Progress on Poverty and Shared Prosperity 111 2018 CONTENTS Team Members and Acknowledgements xi A Strong Foundation to Build on xiii Executive Summary xiii Abbreviations xxi CHAPTER 1  GEORGIA’S TRANSITION – A TURBULENT 25 YEARS 2 A Rocky Path to Social and Political Normalization 4 Economic Rebirth Following Collapse, but Increasing Signs of Strain 5 The Georgian Economy Is Still Leaning Too Much on One Engine: Domestic Demand 7 Georgia is Struggling to Reap the Full Benefits of Pro-Business Reforms 8 Notes 9 References 9 CHAPTER 2  PROGRESS ON POVERTY AND SHARED PROSPERITY 10 Poverty Has Fallen, Especially after 2010 12 Prosperity Has Been Broadly Shared, Contributing to a Reduction in Inequality 14 Wages, Pensions, and Social Assistance Have Been Drivers of Poverty Reduction and Shared Prosperity 15 Challenges Ahead 17 Notes 19 References 19 CHAPTER 3  SUSTAINING GROWTH AND CREATING JOBS 20 What Will Drive Growth in the Long Run? 22 Unleashing New Sources of Growth through Integration into Global Markets 23 Firm-Level Constraints 25 Removing Horizontal Productivity Constraints 30 Notes 37 References 37 vi Georgia: From Reformer to Performer CHAPTER 4  PROMOTING SOCIAL AND SPATIAL INTEGRATION 38 The Demographic Challenge 40 Maximizing Labor Force Participation 41 Stalled Structural and Spatial Transformation 43 Notes 45 References 45 CHAPTER 5  MANAGING RISKS FOR SUSTAINABLE GROWTH 46 Fiscal Space Is Increasingly Constrained 48 Environmental Concerns Need to Be Factored In 50 Notes 52 References 52 CHAPTER 6  PRIORITIZATION 54 APPENDIXES 59 Appendix A Poverty Measurements 61 Appendix B Georgia – A Short Political History 63 Appendix C Firm Dynamics 67 Appendix D Sectoral Mini-Deep Dives 77 Appendix E Sectoral GDP and Employment Multipliers in Georgia Key 79 Appendix F Macroeconomic Indicators, at a Glance 81 Appendix G A description of the Long-Term Growth Model Investment 85 Appendix H Climate Deficiencies 87 Appendix I Georgia Product Space of Competitively Exported Products 91 Notes 96 References 96 Bibliography 99 Boxes ES.1  Priorities for Georgia: From Reformer to Performer xviii 2.1  What Do We Know about Poverty and Gender in Georgia? 15 3.1  Growth Accounting: Why Raising Total Factor Productivity Will Be Key 27 3.2  In Which Sectors Can Georgia Boost Its Export Potential? 30 4.1  Successful Examples of Attracting Skilled Migrants 47 6.1  Knowledge Gaps 65 D.1  Fostering Farmer’s Cooperation in Georgia: Lessons Learned 79 Figures ES. 1  A Prosperity Cycle for Georgia xiv 1.1 Georgia’s 25 Years: Collapse, Stabilization, Acceleration, Crisis, Rebound, and Slowdown 5 1.2 Declining Growth 6 1.3 Strong Domestic Demand 6 1.4 In Europe and Central Asia, Georgia’s Growth is Strong … 6 1.5 … But the Current Account Deficit Remains Large 6 1.6 General Government Revenues, Expenditures, and Fiscal Deficits 7 1.7 Drivers of Fiscal Deficit 7 1.9 The Contribution of Productivity Has Been Declining 8 1.8 Consumption and Investment Drive Growth 8 Contents vii 1.10  Doing Business Ranking 9 1.11  Corruption Perception Index Rankings 9 2.1  Poverty Headcount Using Three Measures of Poverty 14 2.2    Urban and Rural Areas Have Benefited from Poverty Reduction since 2010, Although Differences Persist 14 2.3    Households below the Poverty Line Have Also Benefited, as the Depth and Severity of Poverty Declined since 2010 14 B2.1 Poverty Headcount 15 2.4  Share of People Who Reported Needing Hospitalization but Not Hospitalized Due to Cost 16 2.5  Share of Consultations Where Medicine Was Prescribed but Not Purchased Due to Cost 16 2.6  Shared Prosperity Improved across All Locations 17 2.7  Significant Gaps in Learning Outcomes for Children from Different Social Backgrounds 17 2.8    Income from Pensions and Social Assistance Is Almost as Important as Income from Employment and Agricultural Activities for the Poor in Georgia 18 2.9  Overall Household Income Growth Constant but the Drivers Were Different 19 2.10  Poverty Is Still High by Regional and Global Standards 20 2.11  The Poor, the Vulnerable, and the Middle Class 20 2.12  Moving out and Back into Poverty: Distribution of the Poor and Nonpoor 20 2.13  Poverty Rates Vary across Space in Georgia 21 B3.1 Required Investment-To-GDP And Saving-To-GDP Ratios to Double GDP Per Capita by 2030 27 3.2  Diversification of Merchandise Exports 28 3.1  Dynamics of Exports 28 3.3  GVC Integration 29 3.4  Global Market Shares 29 3.5  Less Dispersion and Some Growth in Georgian Firms’ Productivity 31 3.6  A Twin Challenge: Sustaining Formal Firm Growth and Tackling Informality 32 3.7  Effectiveness of Anti-Monopoly Policy 33 3.9  Global Competitiveness Index: Business Sophistication Pillar rank 33 3.10  Share of Firms with an Internationally-Recognized Quality Certification 33 3.8  Extent of Market Dominances 33 3.11  FDI by Sector 34 3.12  Investment in Fixed Assets 34 3.13  Global Competitiveness Index: Infrastructure 35 3.14  Logistic Performance Index, 35 3.15  Global Networked Readiness Index 36 3.16  Broadband Penetration 37 3.17  Mobile Telephony (Wireless) and 3/4G Mobile-Broadband Penetration 37 3.18  Share of Foreign Currency Denominated Loans and Deposits in Banks 38 3.19  Participation in Education 39 3.20  PISA Scores Reveal Major Quality Concerns 40 3.21  PISA Scores: Georgia is Lagging OECD Comparators 40 3.22  Georgians Are Lacking Soft Skills 41 3.23  Test Scores Have Improved on Average ... 41 3.24  …But Remain below OECD and European and Central Asian Averages 41 4.1  Georgia’s Population Will Keep Declining in the Future 46 4.2  Keeping the Same Dependency Ratio as in 2012 Will Require More Immigrants Aged 15–64 47 4.3  Many Georgians Are Unemployed or Working in Low-Productivity Activities 48 4.5  Labor Force Participation 49 4.4  Georgia’s Gender Gap in Labor Force Participation Remains Substantial 49 4.6  Youth Not in Employment, Education, or Training 49 4.7  Employment Distribution 50 viii Georgia: From Reformer to Performer 4.8  Type of Work 50 5.1  Fiscal Imbalances Have Widened and Their Sustainability Worsened 56 5.2  Maturity of External Debt 58 5.3  Composition of External Debt 58 5.4  Sustainability of Total External Debt 59 6.1  Priorities for Inclusive Growth 62 C.1  Average Firm Size Has Been Falling over the Years … 75 C.2  … Although Less Intensely in Manufacturing 75 C.3  Increasingly, Firms Display More Dynamism over Their Life-Cycle 75 D.1  Growth Constraints for the Success of Small and Medium Farming Enterprises 80 D.2  Services Exports 82 D.3  Georgia Tourist Arrivals and Expenditures 82 D. 4  Price of ElectricityGeorgia and comparators 84 D.5  Electricity Supply and Demand Projections, 84 D.6  Quality Ladders for Key Export Products 86 E.1 Impact per US$ 1 Million of Additional Revenue 89 H.1  Global Competitiveness Index 100 I.1 Georgia Product Space of Competitively Exported Products 103 Tables 3.1  Georgia’s Exporting Firms 28 3.2  Export Survival Probabilities 28 4.1  Overall Population and Urban Population 51 6.1  Twin Goals Filters 63 F.1 Impact per US$ 1 Million of Additional Revenue 93 TEAM MEMBERS AND ACKNOWLEDGEMENTS This report was prepared by a team led by Wolfgang Rodriguez Chamussy); Governance (Mediha Agar, Fengler, George Konda, Aurélien Kruse, Iuliia Elena Georgieva-Andonovska, Sandro Nozadze, Mironova and Sailesh Tiwari. The core team also and Persephone Economou); Transport and ICT included Ana Maria Munoz Boudet, Mariam (Mustapha Benmaamar, Natalija Gelvanovska- Dolidze, Mona Prasad (co-TTL until June 2017), Garcia, Zhenia Viatchaninova Dalphond, Natalya Cesar A. Cancho, Gonzalo J. Varela, Josefina Posadas, Stankevich, and Siddhartha Raja); Investment and Anastasia Shegay.  Climate and Private Sector Development (Iuliia The report was prepared under the overall guid- Mironova and Irina Kokaia); Social Protection, Labor ance of Mercy Tembon, Tomasz Telma, Jan Van and Jobs (Josefina Posadas, Alvaro Gonzalez, Roberto Bilsen, Cécile Fruman, John Panzer, Lisa Kaestner, Fattal Jaef, Carola Gruen, and Mattia Makovec); Maria De los Angeles Cuqui Gonzalez Miranda, Poverty and Equity (Cesar A. Cancho and Xinxin Luis-Felipe Lopez-Calva, and Roumeen Islam. Lyu); Trade and Competitiveness (Iuliia Mironova Patrick Avato, Genevieve Boyreau, Lire Ersado, and Gonzalo J. Varela); PPPs (Clive Harris); Social, Thea Gigiberia, Sarah Michael, and Ozan Sevimli Urban Development and Disaster Risk Management from the South Caucasus Management Team in (Sophia V. Georgieva, Rosanna Nitti, Vica Rosario Tbilisi supported the overall process, and facilitated Bogaerts, Xiaolan Wang, and Kathrine M. Kelm), and its integration into preparation of the CPF.  Water (Peter Goodman and Wilfried Hundertmark). The team is grateful for comments received from Emi Suzuki provided additional analysis on demo- the peer reviewers: Rapti A. Goonesekere, Gabriela graphic trends. Inchauste, and John Gabriel Goddard.  The report benefitted from in-country consulta- The report greatly benefitted from back- tions with the government, private sector stakehold- ground analysis on a series of key topics, ers, think-tanks, donors, and CSOs—and the team including: Agriculture, Land and Water (Peter is grateful for the discussions and for the leadership Goodman); Environment and Climate Change of Inga Paichadze and Tamar Kobakhidze, who also (Darejan Kapanadze, Yevgen Yesyrkenov, and collected first-hand a ccounts o f G eorgian c itizens’ Pablo Cesar Benitez Ponce); Education and Health experiences. The team would like to thank Tamuna (Nino Kutateladze and Aparnaa Somanathan); Namicheishvili for coordinating mission and consul- Energy (Salvador Rivera and Joseph Melitauri); tations meetings, Peter Milne for editing the report Macroeconomics and Fiscal Management (Mariam and providing advice and suggestions, Leonid Dolidze and Mona Prasad); Finance and Markets Mujiri for designing the cover. (Natalia Tsivadze and Angela Prygozhyna); Gender (Ana Maria Munoz Boudet and Lourdes EXECUTIVE SUMMARY The fate of future generations of Georgians will A Strong Foundation to Build on be decided starting now. A girl born in Georgia today can expect to live for more than 86 years, to Georgia has experienced tremendous hardship 2104. This girl, and her peers, will shape Georgia in in the early 1990s. After the breakup of the Soviet the 21st century, but her future will also depend on Union in 1991 and the following civil war, the econ- the path that the country chooses today. What will omy contracted by 65 percent over three years until her life look like when she becomes an adult? What 1993—an unprecedented economic collapse even will it take for her to be able to realize her dreams among former Soviet Union states. Although a mod- in Georgia, rather than abroad? What job prospects icum of stability was eventually achieved, the coun- will the country offer? How can Georgia become a try continued to contend with weak political and leading emerging-market economy and middle-class economic governance up until the Rose Revolution. society, in which her children will have even greater Relations with the Russian Federation remained opportunities? tense, with unresolved territorial conflicts over This Systematic Country Diagnostic (SCD) Abkhazia and South Ossetia, and a large number of highlights the country’s core development chal- internally displaced persons. lenges and opportunities. It takes stock of Georgia’s But over the past decade, Georgia has done development progress since its “rebirth” a quarter well. The economy has grown robustly at an average of a century ago. It also takes a forward look at the annual rate of 4.5 percent. This was despite numer- social and economic landscape, and possible futures ous shocks, including the global financial crisis of that this Georgian girl and her peers will need to 2007-08, the conflict with the Russian Federation navigate. The SCD focuses on the twin goals of end- in 2008, and the drop in commodity prices since ing extreme poverty—which Georgia can achieve 2014, which impacted key trading partners. Poverty in the next decade—and boosting the incomes of declined from 35 percent in 2006 to 21 percent in households, specifically for those at the bottom of 2016. The poor have benefited considerably from the income distribution, to create shared prosper- the government’s social policies, as well as from new ity. The SCD also lays out the elements of a strategic economic opportunities. While inequality remains vision to overcome obstacles and leverage opportu- high by regional standards, it has been declining nities in sustaining high growth, improving equity, in recent years, with strong welfare improvements and creating a sustainable future. among households in the bottom 40 percent of the income distribution. xiv Georgia: From Reformer to Performer Deep reforms in economic management and New Challenges – New Vulnerabilities governance have earned Georgia a reputation of “star reformer.” To bolster the private sector, Georgia faces many new challenges, both internal Georgia has introduced rules and regulations that and external. Its population is shrinking fast due to make it easier to do business, and the country’s inter- low fertility and outmigration: it has declined from national ratings on governance and the investment 5 million in 1991 to 3.7 million today and is pro- climate have soared. The Deep and Comprehensive jected to fall to just 3 million by 2050. Moreover, it Free Trade Area agreement with the European Union is socially and economically divided between ‘islands’ (EU) and the proposed Free Trade Area with China of rapid progress and a large, mostly rural, hinter- are expected to boost trade integration. Energy, tour- land that has not benefited as much from growth ism, and agribusiness offer strong potential to inte- and has fewer opportunities. The combination of grate the country further into the regional and global these trends threatens long-term growth prospects economy. by reducing urbanization and agglomeration oppor- Georgia can begin to dream big. Over the past tunities, as well as the skills pool that the country can 25 years, the country has undergone major transfor- leverage, and by retaining a large proportion of the mations. Georgia is a fundamentally different and population employed in very low productivity activi- better country today than it was a generation ago. ties. Georgia’s small open economy and its specific Georgians can be proud of having achieved middle- geography, neighboring the Russian Federation and income status, dramatically reduced extreme pov- Turkey, also make it vulnerable to external shocks erty to 8 percent, and implemented social policies and regional disturbances, while raising the stakes that support the poorest people and regions. At the for export-oriented development. same time, the country is still far from the level of Social and economic progress has been good, but broad-based prosperity that EU accession countries falls short of expectations, and some gains could now enjoy. be reversed. Georgia’s poverty reduction trajectory FIGURE ES. 1 A Prosperity Cycle for Georgia Investment, trade integration, Productivity gains and competition • Adoption of managerial • Hard and soft trade tools infrastructure • Technology transfer and • Investment and trade Firms innovation policies Workers Mobility and access to Strong labor force opportunities • Improving education • Bridging urban-rural divide • Attracting scarce skills • Agglomeration effects Source: Georgia SCD Team. Executive Summary xv has been slower than that of other high perform- 10 years of 5 percent. With this growth performance, ing peers in the region. Despite relatively high rates Georgia will secure its position as an upper-middle- of economic growth, the pace of poverty reduction income economy, with an average per capita income has been muted until recently, and it remains overly of over US$8,000. Socially, Georgia could transition dependent on pensions and social transfers to a large to become a middle-class society, with more than 80 share of the population that is either unemployed or percent of its citizens above the US$11-per-day level. underemployed. Job creation is weak and women’s Georgia does not need a new growth paradigm, economic participation and employment rates are it needs to adjust and refine its current model. lower than men’s, impacting the country’s income Indeed, Georgia’s robust growth has been based on generation and growth. While earned income is the a growth model with high rates of investment and clearest path toward sustainable welfare improve- a significant trade deficit, implying growing debt. ments, formal job creation has been modest; a large Going forward, it will be key for productivity to rise share of employment remains in unproductive agri- much more sharply. This will require greater inte- culture and unsophisticated services. gration into the world economy, as well as a fuller Fiscal and financial sector resilience is being and better deployment of the country’s human and tested. After years of prudent fiscal management, natural assets. Georgia has already taken steps in this the government has resorted to boosting spending direction and is more integrated into the world econ- to mitigate the impact of shocks, expand the social omy than a decade ago (for example in tourism). For safety net, and fill the infrastructure gap. While the next decade, Georgia needs to extend these gains this course of action may have been warranted, it to usher in a new prosperity cycle (figure ES.1). has resulted in a shrinking of fiscal space that now To enter a new prosperity cycle Georgia will need heightens policy tradeoffs. Moreover, the fiscal out- to continue its path of economic, social, and institu- look is further at risk from large contingent liabilities tional transformation: stemming from public-private partnerships (PPPs), power purchase agreements, and the liabilities of • Economically, Georgia needs to integrate more state-owned enterprises (SOEs). Lastly, the bank- effectively with the rest of the world. Until now, ing sector has accumulated systemic vulnerabilities the country has developed large external imbal- that now exacerbate limited access to finance, while ances, and has not fully leveraged significant for- undermining overall macro-financial stability. eign direct investment (FDI) to grow its export The environment is an asset that the country capacity. It has yet to make the most of its busi- must manage wisely. While Georgia is known inter- ness environment, partly due to a lack of comple- nationally for the richness of its culture and nature, mentary connectivity and skills inputs. To reach the country’s environment is under threat, with the next stage of economic development, Georgia high levels of indoor and outdoor pollution, ille- will need to connect with the world economy and gal logging, and insufficiently controlled exploita- develop through exports. This is the only way for tion of natural resources. This has adverse impacts a small open economy to create a virtuous circle on people’s health and threatens Georgia’s environ- through which: (i) productivity gains make it mental sustainability and its potential as a major attractive to invest in export-oriented production; tourism destination and a producer of quality agri- and (ii) exposure to the global marketplace drives cultural produce. further productivity gains. Given demographic trends and limited fiscal space, there are few alter- To Extend Past Progress, Georgia Needs to native options. Shift Gears • Socially, Georgia needs to build bridges between those who gain from growth and those who are The main challenge for Georgia is to continue its left out. Dualism characterizes Georgia’s economy past progress. Georgia can double its gross domestic and society. While urban households have ben- product per capita and eradicate extreme poverty by efited from economic growth, the rural hinter- 2030 if it sustains the average growth rate of the past land has stagnated. The challenge going forward is xvi Georgia: From Reformer to Performer twofold, requiring the reinvigoration of the rural investment, particularly FDI—and boosting inte- economy, while also building bridges between gration in the global marketplace through greater rural and urban areas by investing in people and export orientation. equalizing access to opportunities for everyone. The country needs to continue improving the It is also important to continue efforts to close environment in which firms operate to attract invest- persistent gender gaps in access to social and eco- ment beyond nontradable sectors and backbone nomic opportunities, an area in which Georgia infrastructure. This calls for value-chain and sectoral has made little progress since the turn of the cen- productivity upgrades, including the development of tury. Moreover, to keep the economic momentum value chains with the potential for growth by provid- going, activation of underemployed Georgians ing increased access to finance and markets, both at may need to be complemented with immigration the value-chain and firm levels. Georgia also needs (or the return of Georgian expatriates) because to address the emerging deficits in skills for the new fertility will remain too low to stabilize the popu- economy, together with sector-specific bottlenecks in lation and workforce size. key sectors, such as agriculture, textile, and tourism. • Institutionally, the challenge is to complete the The main horizontal productivity constraints transition toward a world-class administration. include gaps in transport and information and com- While Georgia has developed islands of gover- munication technology (ICT) infrastructure, capac- nance excellence, all links in the chain need to be ity gaps in public administration, limited access to strong for the system to deliver. Clean govern- credit, and skills bottlenecks. Transport connectiv- ment and a great business environment are neces- ity remains weak and it is further undermined by sary but insufficient conditions. A key component deficiencies in logistics, which raise the cost of trade is the judicial system. It is also crucial that public internally and internationally. Efforts to improve service excellence at the top is extended gradually physical connectivity also need to be complemented to: (i) local levels of government that play a key by further progress in boosting digital adoption, to role in building bridges between the center and leverage important investments in expanding ICT’s the periphery; and (ii) the management of SOEs. availability and affordability. Similarly, the dramatic efforts made to improve the quality of the regula- Leveraging “Brand Georgia”: Pathways and tory and institutional environment at the central/ Priorities top levels needs to be deepened to address significant remaining variability across and within institutions, The analysis contained in this SCD identifies criti- and particularly at local levels of government. Access cal pathways for Georgia to sustain and extend to credit remains a constraint, specifically for small past progress. For Georgia, this does not require and medium enterprises; this calls for action not reinventing the wheel, but rather transitioning from only to ensure that the banking system remains on a “reformer to performer,” or ensuring that the sig- solid footing, but also to decrease the cost of borrow- nificant investments made in building the Georgia ing for firms. Finally, the education system does not brand—accountable government, openness to trade produce enough market-relevant skills, particularly and investment, a pro-business stance—are effec- soft skills. This calls for broad efforts to leverage sig- tively converted into growth and welfare payoffs. nificant gains in access to education, through focus- ing much more on the quality of learning. Strengthening connectivity to further open up the Supporting Productivity-Driven Growth country to trade, international competition and FDI To maintain high rates of economic growth, boost- will be the single most critical driver of efficiency ing productivity will be key. Long-term growth gains. Although the number of exporting firms models point to the core challenge of reigniting pro- has increased in recent years, the progression has ductivity growth, given the demographic dynamics been slow and most exporting firms remain small, and limited scope to dramatically boost domestic with limited product offerings and low chances of savings. This will require a two-pronged approach: survival. Currently, Georgian would-be exporters addressing cross-cutting factors that constrain pro- are still constrained by significant discovery costs. ductivity for firms in the economy—and deter Attracting FDI, beyond backbone infrastructure and Executive Summary xvii the financial sector, is therefore a top priority, which migrants. This could entail efforts to promote the calls for enhanced investment policies and possibly return of the diaspora, as well as to welcome foreign targeted incentives. In turn, weaknesses in logistics nationals. remain a core bottleneck for effective integration in Another priority is to build more bridges between global value chains. This also includes digital and the dynamic and lagging areas of the country to financial logistics, which play an important role for bring rural residents into the modern economy. A Georgian firms to become more competitive. first step would be to equalize access to opportuni- Specific sectors offer significant scope for export- ties in education and health, including through tar- driven expansion, if sector specific constraints to geting inequities in service quality, to ensure that the growth and moving up the value chain are addressed. creation and deployment of scarce human capital is Georgia can leverage initial successes in apparel maximized. In addition, one needs a better under- and tourism. For the former, key priorities include standing of the types of constraints that impede upgrading sector-specific skills and aligning stan- more fluid spatial mobility from rural to urban areas, dards to those of key trading partners. For the latter, as well as economic spillovers from urban growth the main bottlenecks are in the areas of hospitality poles to the rural hinterland. Finally, unleashing the training, quality standards development and moni- potential of the rural economy, while further devel- toring, and sector-specific infrastructure. Moreover, oping tourism, would also go a long way in rebalanc- other tradable sectors also hold significant potential. ing opportunities for productive participation in the Agriculture holds significant potential, but it is being economy across the country. held back by production fragmentation, insufficient value chain infrastructure, and limited adherence to Laying the Foundations for Sustainable Growth core safety and quality standards. In energy, hydro- power development will require efforts to develop Ensuring a sustainable macroeconomic and fiscal cross-border power markets, regulation, and infra- framework, as well as environmental protection, are structure, as well as enhanced frameworks for PPPs. preconditions for the benefits of the policies men- tioned above to materialize over time. In the absence Ensuring Growth Is Inclusive across Social, of sound macroeconomic and fiscal policies, attract- Demographic, and Spatial Dimensions ing investment, financing the required infrastructure, and upgrading service delivery will not be possible. With a declining population, Georgia needs to Likewise, environmental degradation would under- leverage the talents of all its citizens. Given Georgia’s mine a key asset of the country in leading sectors of unique demographic characteristics and trajectory, the economy, namely tourism and agriculture. and the small and declining size of its labor force, it is Fiscal space is increasingly constrained, calling imperative for the country to make sure its skills pool for additional focus on spending efficiency and is optimally used and deployed. In this respect, and sustainability. In recent years, Georgia has relaxed in addition to the focus on skills, two key priorities its traditionally prudent fiscal stance, partly for good stand out: maximizing labor force participation and reasons (expanding social safety nets and respond- addressing enduring spatial divisions. ing to crises). The reduced fiscal headroom places Labor force participation needs to increase, additional emphasis on fiscal prudence, enhanced especially among women. Too few Georgians are planning, as well as on maximizing the effectiveness formal wage workers, especially in rural areas and of spending—particularly for investment. Another among women and youth. One way of increasing priority is to manage possible existing contingent lia- labor force participation is by bringing more women bilities, as well as those that may arise in the context into the labor force, including by expanding the of planned PPPs. availability and affordability of childcare options. Georgia’s environment is one of its great- Equally important are policies to activate the youth est economic assets, which needs to be nurtured. through tackling sources of labor market exclusion. Currently, however, Georgia has the world’s highest Given the demographic dynamics, maintaining mortality rate due to outdoor and indoor air pollu- the size of the working-age population and clos- tion. In addition, unsustainable resource manage- ing the skills gap calls for targeted actions to attract ment practices have put stress on the ecosystem, xviii Georgia: From Reformer to Performer including illegal logging, cattle grazing and forest high losses incurred in the early phase of the post- fires. Finally, the potential negative environmen- Soviet transition. But if it continues its reorientation tal impacts of hydropower development need to toward an internationally integrated economy with be managed from the start, through emphasis on a dynamic labor force, it can become a vibrant hub impact assessments of projects, coordinated manage- on the new Silk Road. The country can even over- ment of water resources and mechanisms for dispute come the “middle-income trap” by following the resolution over water usage. example of many EU economies that have reached high-income status since 1990. For this, Georgia needs to stay the course and be ready for the further Priorities for a Bright Future adjustments that are a normal part of the process of Georgia is on the right track and needs to main- achieving higher levels of income. tain momentum. Georgia is still making up for the BOX ES. 1 Priorities for Georgia: From Reformer to Performer Top Priority: Unlocking Productivity far from global standards, especially economy, whether in rural activities or Growth when it comes to the soft skills (abil- through internal mobility. ity to learn, leadership, autonomy, lan- • Modernizing agriculture and lever- Georgia’s economy does not have a growth guages) that are in highest demand in aging the tourism potential to raise problem per se, but it has accumulated a the new economy. employment and incomes in the rural productivity deficit and depends too much economy. on a small domestic market that is inher- Unlocking productivity growth is a par- ently constrained. Thus, to maintain high amount agenda; without a robust economy Ensuring Growth Remains Inclusive rates of growth, leveraging trade integra- that creates jobs, other investments (for and Sustainable tion will be paramount. example, in social services) will remain To unlock the economy’s productivity underleveraged or become unsustainable. For gains to be sustained over time, the potential, three priorities stand out: economic trajectory of the country needs High Priorities: Addressing Economic to remain compatible with fiscal and envi- • Accelerating integration into global Dualism ronmental stability. This will require: value chains: this is the surest way to overcome information constraints Georgia’s challenging demography is • Preserving the environment, because and discovery costs to access external compounded by economic dualism, it is both important for the health of markets, and to address managerial which means that the pool of talent that the population and constitutes an deficiencies that currently limit produc- the economy can mobilize and leverage asset that the country can leverage for tivity growth in domestic production. through agglomeration effects is shrinking growth. • Tackling hard and soft connectivity con- and below potential. In that respect, priori- • Maintaining a sustainable fiscal and straints to connect Georgia to key mar- ties include: financial position to ensure that the kets in the region and beyond. state can continue to provide essential • Upgrading skills for the new economy, • Equalizing access to opportunities and supportive services to the economy and because Georgia’s workers are still investing in people to ensure that rural the people of Georgia and retain the residents can participate in the modern ability to respond to shocks. ABBREVIATIONS DCFTA Deep and Comprehensive Free Trade Area PISA Program for International Student EU European Union Assessment FDI foreign direct investment PPA power purchase agreement FTA free trade agreement PPD public-private dialogue GDP gross domestic product PPP purchasing power parity or public-private partnership GTAP global trade analysis project SCD Systematic Country Diagnostic ICT information and communication technology SOE state-owned enterprise IDP internally displaced person TFP total factor productivity IHS Integrated Household Survey TSA targeted social assistance LPI Logistics Performance Index UHC universal health care MIC middle-income country UNM United National Movement NBG National Bank of Georgia VAT value added tax NFA National Food Agency WMS Welfare Monitoring Survey NPL nonperforming loan CHAPTER 1 GEORGIA’S TRANSITION – A TURBULENT 25 YEARS Following a turbulent transition from a Soviet republic to an independent state, the Rose Revolution, and subsequent pro-market reforms, Georgia emerged as one of the top re- forming economies in the world in the early 2000s. As a result, Georgians today enjoy a higher standard of living and opportunities for visa-free travel in Europe. In order to maintain high rates of economic growth, Georgia should not shy away from further (and bold) structural reforms and should continue along the path toward further trade integra- tion into international markets. Findings Recommendations • Pro-market and governance reforms, especially on • To maintain past rates of economic growth, Geor- corruption and the tax regime, have propelled Geor- gia’s economic model needs to pivot away from rely- gia to the top of international rankings on the quality ing solely on domestic consumption and investment, of the business environment, which is unprecedent- toward greater productivity. ed in the post-Soviet Union space. • Georgia’s economy relies heavily on domestic de- mand and capital accumulation, while total factor productivity has been declining. In the 1990s, Rusudan Kekelidze—now the principal of Public School No. 210 in Tbilisi—was a teacher at the start of her professional carrier. She still remembers the smell of kerosene, the grayness everywhere, several students crammed together on a single school desk, and poorly equipped classrooms. There was one common wish shared by everyone back then: to survive. It may sound hard to believe today, but as Rusudan says herself, it truly was a fight for survival in those days, both physically and mentally. It was a fight for the future in the very unstable circumstances of those times. “No matter what skeptics say, a long and difficult path has been travelled since then, thanks to which we can see the development of our schools today. Things are so much better now. You can take the new infrastructure as a vivid example of the change. Or just listen to the phrases you may hear in the hallways, such as I can, I want, I will do, I’m happy to....” 4 Georgia: From Reformer to Performer A Rocky Path to Social and Political and parliamentary elections, which established the Normalization United National Movement (UNM) as the dominant ruling party. Georgia’s post-independence transition has been In the following years, the country underwent marked by conflict and upheaval. At indepen- significant governance reforms. The UNM admin- dence, the country found itself in disarray, chaos, istration inherited an economy in dire straits, an and conflict. Civil strife, tensions with the Russian empty treasury and an inefficient administration. Federation, and political instability all exacerbated The government began by focusing on tax collec- economic hardships. tion and prosecuting high-profile corrupt business- men and government officials, sending a strong • The political transition was turbulent. Following signal that corruption would no longer be tolerated. the collapse of the Soviet Union, Georgians over- In parallel, it also began reforms to improve public whelmingly voted for independence and elected service delivery, starting with the then ambitious Zviad Gamsakhurdia as their first president. objective of providing continuous power supply to However, he was overthrown in 1992 by opposi- all. Reforms were also implemented in public reg- tion groups led by former Soviet Foreign Minister istries, business regulations, customs, traffic police, Eduard Shevardnadze, who went on to remain in and entrance examinations for higher education and office for 11 years. He was eventually ousted in local governments. November 2003, following mass demonstrations The results were spectacular. Tax collections widely known as the Rose Revolution. increased from 12 percent of GDP in 2003 to 25 • Georgia endured periods of civil war and unrest percent in 2010 on the back of tax reforms, which related to the separatist aspirations of Abkhazia included firing corrupt officials, the elimination of and South Ossetia. Tense relations with the tax arrears, a reduction in the number of taxes and Russian Federation have been further exacer- tax rates, simplification of the tax code, and the intro- bated by Moscow’s support for these separatist duction of e-filing of tax returns. Similar reforms regions and recognition of their independence. were undertaken in other areas, including starting a These flared up into armed conflict in August business and customs, among others. Georgia’s per- 2008, which resulted in thousands of additional formance in international rankings soared. These refugees. Although a cease-fire was negotiated far-reaching pro-market and governance reforms under international pressure, this territorial issue made the country a leader in the post-Soviet space in remains unresolved. terms of the business environment. • The economy collapsed and remained weak for Growing dissatisfaction with the UNM even- a decade. In the three years following indepen- tually led to a political transition, although core dence, real gross domestic product (GDP) fell by developmental and strategic orientations were 65 percent. Macroeconomic instability prevailed broadly maintained. The consequences of interna- until the mid-1990s. During 1992–94, inflation tional conflict and the global financial crisis of 2007– averaged nearly 7,000 percent. The situation 08 created a fertile ground for popular discontent improved in 1995 with the introduction of a new with the UNM. Political opposition was consolidated currency, the elimination of price controls, and under the “Georgian Dream – Democratic Georgia” a reduction in trade barriers. However, Georgia movement, which successfully challenged the ruling suffered from the Russian Federation’s 1998 eco- UNM and won the election in October 2012. nomic crisis, as well as stalled reform momentum The Georgia Dream leadership placed greater and rising levels of corruption. emphasis on social reforms and inclusive growth. The period during 2012–16 saw increased focus on The Rose Revolution opened a new chapter pro-poor spending and the introduction of universal in Georgia’s political and economic trajectory. It health care. Nonetheless, stubbornly high unemploy- was brought about by widespread protests over dis- ment and macroeconomic challenges continued to puted parliamentary elections and culminated in depress social outcomes. the ouster of President Eduard Shevardnadze, which Georgia has consistently maintained a pro-West- marked the end of Soviet-era leadership in the coun- ern geopolitical orientation and pro-trade policies. try. The Rose Revolution triggered new presidential In June 2014, the country signed an Association Chapter 1: Georgia’s Transition – A Turbulent 25 Years 5 Agreement with the European Union (EU), which and 2016, the economy grew at a brisk annual aver- included a Deep and Comprehensive Free Trade Area, age rate of 5.5 percent, below that of resource-rich and constitutes a first step toward membership in the economies, such as Azerbaijan or Kazakhstan, but EU. On February 2, 2017, the European Parliament faster than in the Russian Federation, Moldova, voted in favor of visa-free travel for Georgian citizens Estonia, or Ukraine. Thanks to this robust rate of to 26 countries of the Schengen Area and four EU growth, Georgia returned to pre-independence levels Schengen candidate countries. of GDP per capita in 2013. Over this period, growth Overall, Georgians are optimistic about the was driven by consumption and high rates of invest- future. Opinion polls by the National Democratic ment with mostly negative contributions from net Institute show that 72 percent of Georgians believe exports. Far-reaching structural reforms to improve the country to be in a better place today than 15 the business environment, liberalize trade, upgrade years ago, and 69 percent believe that the next gen- infrastructure, and strengthen public finances helped eration will also be better off. Institutions, such as to boost average annual growth to 9.3 percent during the Georgian Orthodox Church, public services, 2004–07 (figure 1.1). Net foreign direct investment and the army are generally assessed favorably. At the (FDI) inflows (mostly in construction and services) same time, Georgia is not immune from the broader reached 16.5 percent of GDP in 2007. After the eco- trends of populism and polarization that have swept nomic downturn of 2008–09, a fiscal stimulus and a through the region, which makes it important for the pickup in external demand helped growth rebound country’s leadership to avoid complacency. to 5.8 percent annually during 2010–13. Recently, however, the growth momentum has faltered, mostly due to structural headwinds (fig- Economic Rebirth Following Collapse, but ures 1.2 and 1.3). The regional environment has Increasing Signs of Strain deteriorated since 2014, with the plunge of oil prices, The post-independence collapse was particularly and the economic slowdown in China, both believed severe. Over a span of four years, GDP per capita to constitute a “new normal” for the region (figure contracted almost fourfold, the sharpest decline 1.4). Georgia saw a significant weakening in its exter- among all the former Soviet Union states for which nal performance, stemming from depressed demand data are available. in major trading partners, and a loss of competitive- The speed and pace of the subsequent recovery ness brought about by relatively larger depreciation was also dramatic. In the 20 years between 1997 in their currencies. Georgia’s growth decelerated FIGURE 1.1 Georgia’s 25 Years: Collapse, Stabilization, Acceleration, Crisis, Rebound, and Slowdown Per capita GDP, 1990–2015 10,000 Independence Rose revolution EU-Georgia: Deep and Comprehensive Free Trade Area 9,000 Lari introduction GDP per capita (constant 2011, US$) 8,000 Russo-Georgian war 7,000 Constitution approved 6,000 by parliament 5.000 4.000 3,000 2,000 Stabilization and Liberalization and early reforms pro-market reforms 1,000 0 1990 1995 2000 2005 2010 2015 Source: Adapted from World Development Indicators. 6 Georgia: From Reformer to Performer FIGURE 1.2 FIGURE 1.3 Declining Growth Strong Domestic Demand GDP and Per Capita GDP, 2008–17 GDP and Drivers of Growth, 2008–17 6,000 8 8 6 6 4,000 4 4 Percent Percent 2 US$ 2 0 2,000 0 -2 -2 -4 0 -4 2008 09 10 11 12 13 14 15 16 17f 2008 09 10 11 12 13 14 15 16 17f Agriculture Construction Industry GDP per capita (US$) Real GDP (% change) Services Net taxes GDP Source: World Bank staff calculations based on data from Geostat. Source: World Bank staff calculations using data from Geostat. Note: F = forecast. Note: F = forecast. sharply to 2.7 percent in 2016—its weakest perfor- the deterioration in asset quality has been contained, mance since the 2008–09 global financial crisis— supported by sound supervision. while total exports fell by 4 percent, after falling by In response to these shocks, the National Bank 23 percent in 2015. Remittances—mostly from the of Georgia (NBG) largely maintained the flex- Russian Federation and Greece—dropped by 23 per- ibility of the lari and raised interest rates to curb cent in U.S. dollar terms in 2015, and recovered by inflation. The depreciation of the lari helped to safe- only 5 percent in 2016, depressing private consump- guard a modest level of reserves of US$3.0 billion in tion, which fell by 0.3 percent. Preliminary data for December 2017, equivalent to about four months of 2017 suggest a rebound driven by strong exports and goods and services imports. Meanwhile, inflation- underpinned by regional recovery and fading head- ary pressures emerged from the pass-through of the winds. Nonetheless, the recent slowdown has exposed depreciation, and annual inflation accelerated from vulnerabilities, which must now be addressed. 1–2 percent in 2014 to 5–6 percent during 2015. In The deterioration in the external sector has led response, the NBG raised its policy rates in incre- to heightened macroeconomic vulnerabilities. The ments about once a month, from 4 percent to 8 current account deficit widened to 12 percent of percent in 2015. As the annual inflation subsided to GDP in 2015 and then even further to an estimated almost zero toward the end of 2016, the NBG cut the 12.8 percent in 2016 before improving to estimated policy rate to 6.50 percent in September. In response 9 percent in 2017 (figure 1.5). Although FDI and to the emerging inflation expectations caused by official loans remain resilient sources of financing, the recent depreciation and a significant increase in the large external imbalance generated significant excise taxes on tobacco and fuel for 2017, the infla- depreciation pressures on the Georgian lari, which tion remained slightly above the NBG target during lost over 50 percent of its value against the U.S. dol- most of the 2017 prompting the NBG to increase the lar over 2015–17. Given that public and private debt refinancing rate by a cumulative 0.75 basis points to is largely U.S. dollar-denominated, the Georgian 7.25 percent by December 2017. economy is vulnerable. Georgia’s public external A budget overrun in 2015 and 2016 raised con- debt rose to 34 percent of GDP by the end of 2017, cerns over the government’s fiscal stance. Although up from 27 percent of GDP three years earlier, and the government planned a budget deficit of 3 percent total gross external debt (both public and private) of GDP both for 2015 and 2016, larger-than-envis- rose to 112 percent of GDP by end-September 2017. aged spending led to a widening of the deficit to 3.8 The banking sector is also exposed to exchange rate percent of GDP (figure 1.6) in 2015 and further to risks, as over 60 percent of loans are denominated in 4.1 percent of GDP in 2016. Half of the overrun was U.S. dollars. So far, the ratio of nonperforming loans caused by mounting spending on health and other to total gross loans is low (down from 3.5 percent at social benefits (figure 1.7), as beneficiaries started the end of 2014 to 2.6 percent at the end of 2017) as to take up services from the universal health care Chapter 1: Georgia’s Transition – A Turbulent 25 Years 7 FIGURE 1.4 FIGURE 1.5 In Europe and Central Asia, Georgia’s Growth Is … But the Current Account Deficit Remains Large Strong … Trade and current account deficit, 2007–17 Growth projections, Georgia and comparators, 2016 and 2017 50 Uzbekistan 40 Romania 30 Kosovo 20 Georgia 10 0 Percent Turkey -10 Bulgaria -20 Kazakhstan -30 Armenia -40 Albania -50 Kyrgyz Republic -60 Moldova -70 Bosnia and Herzegovina 2007 08 09 10 11 12 13 14 15 16 17e Ukraine Export Import Current account balance Belarus Source: Adapted from the National Bank of Georgia 2017. Russian Federation Note: E = estimate. Macedonia, FYR Azerbaijan FIGURE 1.6 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 General Government Revenues, Expenditures, and Percent Fiscal Deficits 2016 2017e Share of GDP, 2008–18 Source: World Bank staff calculations based on data from Geostat. 40 30 program. The other half arose from transfers and net 20 lending to state-owned enterprises (SOEs), which 10 Percent more than doubled in 2015. 0 Emerging fiscal pressures prompted the gov- -10 ernment to take corrective steps in 2017. The -20 administration that came to power in October 2016 -30 introduced fiscal consolidation measures, which -40 appear to have paid off in 2017. Higher expenditure 2008 09 10 11 12 13 14 15 16 17e 18f outlays on social programs and investment were Revenues and grants Total expenditure Overall fiscal deficit matched with increased tax and nontax revenues Source: Adapted data from the Georgian Ministry of Finance. (despite the personal income tax reform and thanks Note: E = estimate and F = forecast to the robust pick-up of growth) and some admin- istrative spending restrictions. Nonetheless, struc- FIGURE 1.7 tural pressures on spending remain high. Together Drivers of Fiscal Deficit, Change in Fiscal Balances with significant contingent liabilities—stemming Share of GDP, 2009–18 from public-private partnerships, power purchase 4 agreements, and quasi-fiscal operations of some 2 SOEs—they imply sustainability risks that need to be 0 carefully managed. Percent -2 -4 The Georgian Economy Is Still Leaning Too -6 Much on One Engine: Domestic Demand -8 -10 While structural impediments to growth could be 2009 10 11 12 13 14 15 16 17e 18f ignored during the boom years, this is no longer Revenues and grants Social benefits true. With the prospect of prolonged regional head- Capital expenditure Other expenditure Deficit winds, a new focus on sources of long-term produc- Source: Adapted data from the Georgian Ministry of Finance. tivity gains is required. Note: E = estimate and F = forecast 8 Georgia: From Reformer to Performer The economy remains over reliant on domes- FIGURE 1.8 tic demand. Services account for nearly two-thirds Consumption and Investment Drive Growth, 2008–17 of GDP, but—with the exception of tourism—are 15 mostly made up of nontradable activities, with the 10 highest growth rates in domestic trade, hotels and restaurants, transport and communications, and 5 financial services. Private consumption was sup- 0 Percent ported by higher disposable incomes, but also sig- nificant credit growth (figure 1.8). -5 Meanwhile, productivity has declined. Total fac- -10 tor productivity explained most of economic growth during 2004–12, thanks to one-off gains from eco- -15 nomic restructuring. But it has fallen since, leaving -20 capital accumulation to play an increasingly impor- 2008 09 10 11 12 13 14 15 16e 17f tant role (figure 1.9). Private consumption Public consumption Investments Net exports GDP growth Source: Adapted data from the Georgian Ministry of Finance. Georgia is Struggling to Reap the Full Benefits of Pro-Business Reforms world governance indicators. In regulatory quality, While conditions for doing business are favorable, Georgia’s rank improved from the bottom 20th per- more dynamic private sector growth is hampered centile to the top 20th percentile. In the other two by structural problems. The country has demon- dimensions, political stability and voice and account- strated stellar progress on business climate reforms. ability, Georgia is among the top 15 improvers glob- Over the past six years, Georgia has been in the top ally. Finally, Georgia’s economy is considered to be decile of the Doing Business rankings (figure 1.10). It among the most liberal in Europe and Central Asia, also has one of the lowest corruption levels in Europe as demonstrated by the Heritage Foundation’s Index and Central Asia as measured by Transparency of Economic Freedom. International’s Corruption Perception Index, and Nonetheless, the country’s actual economic per- the World Bank’s governance indicators (figure formance is not on par with these stellar ratings. 1.11). It is among the top three counties with the Therefore, Georgia needs to focus on understand- most significant improvements over the past 20 years ing what complementary inputs may be required in four out of six dimensions of the World Bank’s to leverage its solid foundations. Issues include FIGURE 1.9 The Contribution of Productivity Has Been Declining, 1997–2017 15 10 5 Percent 0 -5 -10 1997 98 99 2000 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16 17e Capital Labor Total factor productivity GDP growth Source: Adapted data from the Georgian Ministry of Finance. Chapter 1: Georgia’s Transition – A Turbulent 25 Years 9 FIGURE 1.10 FIGURE 1.11 Doing Business Ranking, 2007–17 Corruption Perception Index Rankings 1 Uzbekistan 2007 Turkmenistan 5 Tajikistan 2009 Kyrgyz Republic 10 Ukraine Russian Federation 2011 15 Kazakhstan Rank 20 Moldova 2013 Azerbaijan 25 Armenia Macedonia, FYR 2015 30 Bosnia and Herzegovina Albania 35 2017 Belarus 40 Bulgaria Turkey 0 5 10 15 20 25 Serbia Percent Romania Percentile rank Doing Business rank Hungary Source: Adapted from World Bank Doing Business data. Croatia Slovak Republic Czech Republic dysfunctional land markets, inadequate firm insol- Latvia vency frameworks, insufficient financial depth and Georgia inclusion, and skills mismatches in the labor mar- Lithuania Slovenia ket that constrain business growth and investment. Poland These challenges, combined with emerging macro- Estonia economic imbalances, remaining institutional inef- 0 20 40 60 80 100 120 140 160 ficiencies, and fluid political dynamics translate into Georgia’s low sovereign and corporate credit ratings. Rank Georgia is rated 84th (out of 180 countries) in its Source: Adapted from Transparency International Corruption Perception Index. institutional investor credit rating and is two notches below investment grade in Moody’s, Standard & rose from 7.6 percent in the end of 2014 to 8.1 percent by Poor, and Fitch credit ratings. These factors make the third quarter of 2016. investment in Georgia riskier, reducing investor 5. Or potentially tradable, yet nontraded appetite and increasing the cost of capital, ultimately 6. Household debt accounts for 27 percent of GDP and impeding Georgia’s deeper integration into the 180 percent of households’ disposable income. 7. While factoring in human capital in the growth global economy. decomposition may modify the picture somewhat, possi- bly resulting in a higher total factor productivity residual, Notes it would probably not change the overall dynamic of slow- ing productivity growth. 1. World Bank (2012). 8. Control of corruption, rule of law, regulatory qual- 2. NDI (2017). ity, and government effectiveness. 3. Out of total external debt, 30.5 percent is state debt (mostly from international financial institutions on con- cessional terms), 9.5 percent comes from SOEs, 20 percent References from the banking sector, 20 percent from the corporate sector, and 20 percent from intercompany loans. World Bank. 2012. Georgia - Public Expenditure Review: 4. This is calculated following the International Managing Expenditure Pressures for Sustainability and Monetary Fund’s definition to identify nonperforming Growth. Public Expenditure Review. Washington D.C. loans (NPLs) to be loans over 90 days overdue. Under World Bank. an alternative more conservative definition used by the NDI (National Democratic Institute). 2017. Results of National Bank of Georgia, which accounts loans over 30 Public Opinion Polls in Georgia. Washington, D.C.: NDI. days overdue as NPLs, the NPL to total gross loans ratio CHAPTER 2 PROGRESS ON POVERTY AND SHARED PROSPERITY Over the past seven years, Georgia has achieved impressive results in lifting people out of poverty, as well as improving their overall well-being. Earned wages, pensions, and social assistance have played a key role in increasing household incomes and, because these gains have been well distributed, they have reduced inequality. However, many Georgians still remain precariously close to the poverty line. To move these vulnerable groups more comfortably into the middle class, future growth will need to generate more productive employment, while access to quality education will need to be equalized so all can participate productively in the economy. Findings Recommendations • While the poverty rate has declined sharply to 4 • Address structural bottlenecks in the labor market percent by the international US$1.90 benchmark, and the educational system that are preventing large the national poverty line indicates that one in five segments of the population from participating in pro- Georgians is still living in poverty. ductive employment. • Half of the population is considered vulnerable to • Bridge existing gender, regional, urban-rural divides falling into poverty, while inequality persists across in terms of access to opportunities, and improve mo- regions and between rural and urban populations. bility to optimize the mobilization of talent. • Growth has not benefited the poor as much as it should have because it was not accompanied by ro- bust job creation. Progress on Poverty and Shared Prosperity 11 Manana is a stay-at-home mother of seven children aged between 9 and 22. Her husband, Tamaz, spends most of his time at the landfill hunting for scrap metal, and is the sole breadwinner in the family of ten. The family also cares for an elderly grandmother who lives with them in a three-room cinder block hut with a leaky roof and cardboard for windows. Manana considers herself to be living on the edge of extreme poverty, but she still believes there are households that are far worse off than hers and, regardless of the difficulties, she is proud of her choice to have so many children. “They wear each other’s hand-me-downs, and it’s a lot of work, but I love kids. I always wanted to have as many as we could. There are large families that live in train wagons, or don’t even have a roof over their heads. There are people much worse off.” Manana believes that the priority in tackling poverty should be equal access to education. “When someone with no ability can still get into a school just because they can pay, and when my child, who is talented, cannot just because we don’t have money, that’s wrong. They are trading talent for money and I don’t want that to happen in our country anymore. My 14-year-old daughter Iro is great at table tennis, but we can’t afford to equip her or pay for lessons regularly.” Monthly social assistance to the family received from the state amounts to GEL 500 in total, which Manana claims is barely enough to buy shoes for all seven children, not to mention other mandatory items for school that do not fall under the assistance program. Having an illegal job and running the risk of losing social assistance for the entire family does not seem to be the correct or most promising way of fighting poverty. Nonetheless, Manana is doing her best to stay positive and optimistic about her only dream: one day having enough space for all of her children in a house with dry walls and a watertight roof that will help her to keep the children warm and healthy. 12 Georgia: From Reformer to Performer Poverty Has Fallen, Especially after 2010 FIGURE 2.1 Poverty Headcount Using Three Measures of Poverty National, international, and lower middle-income countries’ poverty The country has made steady progress in reducing lines, PPP, 2004–16 poverty, mostly since 2010. Poverty decreased by 40 more than 15 percentage points between 2010 and 35 2015, implying that a net cumulative total of more than 550,000 Georgians escaped poverty during 30 this period. This recent success stands in contrast to 25 Percent 2006–10, when the country failed to make any mean- 20 ingful dent in poverty, as modest gains were largely 15 wiped-out by the twin shocks of the conflict with the 10 Russian Federation in 2008 and the impact of the 5 global financial crisis after 2007–08 (figure 2.1). 0 Both urban and rural areas have benefited, 2004 2006 2008 2010 2012 2014 2016 although rural areas still lag behind. Since 2010, the National International (US$1.90 per day) trend of poverty reduction has been shared across Lower-middle-income (US$3.20 per day) urban and rural areas, but the latter still face higher Source: World Bank staff calculations based on data from the IHS database poverty incidence: in rural areas poverty stands at (Geostat) and Europe and Central Asia Team for Statistical Development. Note: PPP = purchasing power parity, 2011 prices. 25.5 percent, while it is roughly 17 percent in cit- ies. The post-2010 dynamics contrast to pre-2010 trends, when poverty decreased at a slower pace in Improvements have also been noteworthy for cities (after increasing in 2004–06), while increasing those still living below the poverty line. The poverty in rural areas, peaking at 40.9 percent in 2010, based gap index, which is sensitive to both the headcount on the national poverty line (figure 2.2). and the distance from the poverty line for house- Households headed by males benefited more holds living in poverty, declined from 12.5 percent from poverty reduction than those headed by of the poverty line in 2010 to 6.0 percent in 2016. women (who represent about 26 percent of house- The severity of poverty index, which places a greater holds in 2015). Poverty for male-headed households weight on households furthest from the poverty line, decreased from roughly 35 percent to 20 percent, also improved (figure 2.3). while for female-headed households the decline was Georgia has also done well on non-income from 38 percent to 24 percent—smaller in absolute dimensions of well-being. Infant mortality fell from and relative terms. This pattern is present in both close to 30 per 1,000 live births in 2000 to about 10 urban and rural areas (box 2.1). per 1,000 live births in 2015. Life expectancy at birth FIGURE 2.2 FIGURE 2.3 Urban and Rural Areas Have Benefited from Poverty Households below the Poverty Line Have Also Reduction since 2010, Although Differences Persist Benefited, as the Depth and Severity of Poverty Absolute poverty by location, 2004 –16 Declined since 2010 50 FGT poverty measures, 2004–16 14 40 12 10 30 Percent Percent 8 20 6 4 10 2 0 0 2004 2006 2008 2010 2012 2014 2016 2004 2006 2008 2010 2012 2014 2016 FGT1 FGT2 Tbilisi Rest of urban Rural Source: World Bank staff calculations based on data from the IHS database Source: World Bank staff calculations based on data from the IHS database (Geostat). (Geostat). Note: FGT = Foster-Greer-Thorbecke. Chapter 2: Progress on Poverty and Shared prosperity 13 BOX 2.1 What Do We Know about Poverty and Gender in Georgia? Poverty rates vary depending on house- assistance (figure B2.1). One third of these income. For households dependent on a hold composition, location and the ability households without earners is headed by sole female earner, their poverty rates of its members to generate an income. a woman—on average, an elderly woman, are at the same level or lower than the In Georgia, female-headed households and another one-third comprises tradi- national poverty rate, particularly those account for less than one-third of all tional nuclear households of married adult with dependents. Among households that households. Half of them report not having couples with children. depend on the labor income of a single a labor income earner in the household, Of the households with a single earner, earner, more than two-thirds depend on a which only happens in one third of male- those with a sole male earner also have male earner, a share that is higher among headed households. poverty rates above the national poverty the poor. Households where both spouses When looking at the earner composi- levels, and are more likely to have, in addi- earn a labor income are the least likely to tions of households, focusing on differ- tion to dependents, another adult in the be poor when compared with other house- ences by gender and labor income, the household who is not working for pay (for holds when only one spouse works, more highest poverty rates are for households example, a spouse). These households, so when including dependents. Poverty with no labor income earners, which rep- as most households with dependents, levels in 2010 were higher across all cat- resent 32 percent of households. These are more reliant on nonlabor income than egories described, but the ranking was are households that rely largely on agri- other households, as labor income repre- roughly similar when considering the num- cultural income, pensions, and social sents a lower share of the total household ber of earners in the household. FIGURE B2.1 Poverty headcount, by household characteristics, 2010 and 2016 3 2 32 20 4 10 8 50 40 Headcount 30 20 10 0 National Households w/ Households w/ Households w/ Households w/ Households w/ Households w/ Households w/ poverty rate no labor one male one female one male one female main couple main couple income worker w/ worker w/o worker w/o worker w/ working w/ working w/o dependents dependents dependents dependents dependents dependents Share of total population, 2016 (%) Poverty headcount, 2010 Poverty headcount, 2016 Source: World Bank staff calculations based on data from the IHS database (Geostat). Note: A dependent is defined as an individual younger than 18 or older than 65. An earner is defined as an individual having labor income different from zero in the past year. increased from 70 in the mid-1990s to 72.7 in 2016. However, internally displaced persons (IDPs) Literacy is almost universal among adults and some and the Azerbaijani minority have poorer living 98 percent of children aged 6 to 15 are enrolled in standards than the rest of the population. At 7 school. Tertiary education enrolment, which dipped percent of the population, Georgia has one of the briefly after the introduction of reforms requiring highest shares of IDPs in the world. Apart from the the accreditation of educational institutions, has political and economic implications of the unre- recovered to pre-reform levels, and stood at 43 per- solved conflicts that spawn them, the country also cent in 2015. Access to electricity and an improved faces the burden of ensuring sustainable housing and drinking water source is now nearly universal. The livelihoods for an IDP population that is still largely share of dwellings with some form of heating sys- dependent on social transfers. At present, under 40 tem increased from 19 percent in 2006 to 34 percent percent of IDPs own their own homes and about 22 in 2015. percent live in new buildings and cottage settlements. 14 Georgia: From Reformer to Performer However, 38 percent still inhabit collective centers in 2012 to 8.4 percent in 2015), but the current ratio (hotels or public buildings where they were given remains below the Europe and Central Asia region shelter pending resettlement). While some collective middle-income country average of 10.5 percent. centers have been rehabilitated, living conditions in At the same time, there are deeper, longer-term most of these are substandard and overcrowded. As a structural problems in the health sector that are result, the overall poverty rate among IDPs is higher a concern for sustainability. The current health than in the general population, especially in urban system is poorly adapted to dealing with the grow- areas, where families with an IDP have a poverty rate ing burden of chronic diseases efficiently and cost- 3 percentage points higher than the urban average. effectively. The structure of the current system and In addition to IDPs, the Azerbaijani minority that incentives embedded in it are a major driver of costs. is concentrated in certain regions in the south and This includes poor access to good quality primary southeast of the country has lower living standards care services, and the lack of strategic purchas- and worse access to services than the general popula- ing capacity to effectively control costs. The service tion. Among Azerbaijani households the poverty rate delivery system needs a transformation, which would stands at 37 percent, well above the national average shift service delivery from expensive hospital care to of 21 percent. more cost-effective and equitable primary care ser- High out-of-pocket expenditures on health vices. Finally, the challenge of continuing, and possi- are keeping many Georgians in poverty. Universal bly expanding, UHC coverage to provide the desired health care (UHC) was adopted in 2013 to address financial protection for the population in a tight fis- high out-of-pocket spending for health, which was cal environment has become increasingly binding. estimated to be keeping as many as 9 percent of Georgians in poverty in 2010. However, the expan- Prosperity Has Been Broadly Shared, sion of UHC did not succeed in easing this burden Contributing to a Reduction in Inequality for households: based on the 2015 household budget survey, there was no significant decline in the share There have been significant improvements in the of households that incur impoverishing effects of welfare of the bottom 40 percent, particularly since out-of-pocket expenditures (figures 2.4 and 2.5). 2010. The consumption of households in the bottom Georgia needs to increase its investments in the 40 percent of the income distribution (in both urban health sector to improve population health, reduce and rural areas) grew faster than that of the entire the financial burden on households, and ensure population between 2010 and 2015. This was in sharp the productivity of its human capital. Public health contrast to the period 2006–10, when the bottom 40 spending has risen sharply with UHC implementa- percent were particularly hard hit (figure 2.6). This tion (from 4.0 percent of total government spending puts Georgia’s shared prosperity performance on par FIGURE 2.4 FIGURE 2.5 Share of People Who Reported Needing Hospitaliza- Share of Consultations Where Medicine Was tion but Not Hospitalized Due to Cost Prescribed but Not Purchased Due to Cost 2010 and 2014 2010 and 2014 Total Total Urban Urban Rural Rural Poorest fifth Poorest fifth Second Second Third Third Fourth Fourth Richest fifth Richest fifth 0 1 2 3 4 0 5 10 15 20 25 Percent Percent 2010 2014 2010 2014 Source: Adapted from the IHS database (Geostat). Source: Adapted from the IHS database (Geostat). Chapter 2: Progress on Poverty and Shared prosperity 15 FIGURE 2.6 Shared Prosperity Improved across All Locations Household consumption per capita, annualized growth, 2006–15 (% per capita) National Tbilisi Rest of urban Rural 10 8 6 4 Percent 2 0 -2 -4 -6 2006–10 2010–15 2006–10 2010–15 2006–10 2010–15 2006–10 2010–15 All samples Bottom 40% Source: World Bank staff calculations based on data from the IHS database (Geostat). Note: Data refer to household consumption per capita, annualized growth. with that of Kazakhstan in 2009–13 and the Russian children (of the same age, or grade) in the top and Federation in 2007–12, when both countries per- bottom quintiles of the socioeconomic distribution formed particularly well. is equivalent to three years of schooling.1 Although income inequality has declined in recent years, it is still high. Although inequality Wages, Pensions, and Social Assistance declined after 2010, the consumption Gini coefficient Have Been Drivers of Poverty Reduction still stood at 36.6 percent in 2016 (when measured and Shared Prosperity over the aggregate used for international poverty measurement) making Georgia one of the countries Wages, pensions, and social assistance have been with the highest levels of income inequality in the driving household income growth. Income from European and Central Asian region. economic activities, namely labor and agricultural, Inequality of opportunity also appears to be constituted close to half of total income for the poor high. For example, results from the 2015 round of in 2015 (47 percent). With the expansion of social the Program for International Student Assessment spending in recent years, income from social assis- (PISA) show sharp differences in learning outcomes tance (including noncontributory old-age pensions) by socioeconomic status, urban/rural location, gen- came to account for 41 percent, mainly comprising der, and exposure to preschool (figure 2.7). Every pensions (27 percent) and targeted social assistance 30-point difference in PISA score corresponds to a (TSA) (11 percent) (figure 2.8). Labor income (that difference of about one year of schooling. By this is, wages) is relatively more important in Tbilisi reasoning, the difference in science scores between and other urban areas, while agricultural income FIGURE 2.7 Significant Gaps in Learning Outcomes for Children from Different Social Backgrounds Average science scores in PISA, 15-year-olds, 2015 Economic, social, Rural-urban Gender Preschool and cultural status 371 456 390 426 403 420 399 422 Bottom 20% Top 20% Rural Urban Male Female 0–1 years 2+ years Source: Adapted from OECD 2015. 16 Georgia: From Reformer to Performer FIGURE 2.8 Income from Pensions and Social Assistance Is Almost as Important as Income from Employment and Agricultural Activities for the Poor in Georgia, 2015 National Tbilisi Rest of urban Rural 100 90 80 70 60 Percent 50 40 30 20 10 0 Poor Bottom 40% All Poor Bottom 40% All Poor Bottom 40% All Poor Bottom 40% All Labor income Agricultural income Pensions Targeted and other social assistance Remittances Other inter-household transfers Other income Source: World Bank staff calculations based on data from the IHS database (Geostat). Note: Social assistance includes noncontributory pensions. dominates in rural areas (28 percent). However, up even more during this period if social assistance labor income still contributes more than 20 percent had not been available. After 2010, higher rates of of total income for the poor in rural areas, suggesting employment and faster growth of labor incomes that they have been able to access some opportuni- drove overall household income gains. The share ties outside of self-employment in agriculture. The of social assistance decreased to close to 30 percent. income from international remittances represents a This result is also reflected in the drivers of poverty modest share, but inter-household transfers within reduction. Transfers were the main drivers of pov- the country are nonnegligible. Relative to the pop- erty reduction before 2010, while economic activity ulation as a whole, (as expected) the poor rely to a became more prominent thereafter (figure 2.9). much greater extent on social assistance. Dynamics for male- and female-headed house- Pensions and social assistance helped to main- holds were similar over 2006–10, but over 2010–15 tain household income during the period of crises, male-headed households benefited more from the but labor income has become a more important employment opportunities created during that driver after 2010. Average household income growth period. In contrast, female-headed households ben- was roughly constant (7 percent per year) from efitted equally from pensions and an increase from 2006–15. During the period of crises in 2006–10, labor income. This is large due to the much larger social assistance (mainly noncontributory pen- number of female pensioners.2 sions) and inter-household transfers accounted for Although social assistance is an important life- close to 80 percent of observed growth in house- line for the poor, providing better opportunities hold incomes, mitigating adverse shocks to earned in the labor market is the surest way out of pov- income. In contrast, income from labor markets erty. Between 2009 and 2015, incomes increased for and agricultural sales became more prominent post- both the chronic poor (those who were poor in 2009 2010, explaining over 80 percent of observed income and remained poor in 2015) and “escapers.” For the growth (figure 2.9). chronic poor, incomes rose thanks to increases in This was particularly pronounced for those at social assistance, while for the “escapers” labor earn- the bottom of the income distribution. Between ings constituted the main driver for escaping poverty. 2006 and 2010, income from transfers was, by and Although consumption increased only marginally for large, the sole driver of income growth for those in the chronic poor, their income almost doubled over the bottom 40 percent of the income distribution. the same period, thanks mainly to increases in social Given that poverty actually increased between 2006 transfers (TSA and pensions). In contrast, “escap- and 2010, this suggests that poverty would have gone ers” not only experienced faster income growth (135 Chapter 2: Progress on Poverty and Shared prosperity 17 FIGURE 2.9 Overall Household Income Growth Constant but the Drivers Were Different, 2006–15 a. 2006–10 b. 2010–15 12 12 10 10 8 8 6 6 Percent Percent 4 4 2 2 0 0 -2 -2 -4 -4 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Social assistance Earnings of the employed Employment rate Agricultural self-consumption PC/PAE Property income Dependency rate Agricultural sales Remittances Inter-household transfers Total Source: World Bank staff calculations based on data from the HIS database (Geostat). Note: Social assistance includes noncontributory pensions. percent), but also more than proportional consump- For instance, an estimation of the net impact of the tion growth (200 percent). 4.0 percent inflation witnessed in 2015 shows that poverty incidence increased by close to 3 percent- Challenges Ahead age points just on that account. Impoverishment from health spending is another example: 6.6 per- First, poverty remains high. Today, roughly one in cent of Georgian households became poor in 2015, five Georgians is still poor, based on the national entirely due to out-of-pocket health expenditures. poverty line. Poverty in Georgia measured using Vulnerability manifests itself in the high degree of the global poverty line for lower middle-income churning around the poverty line. Close to half of countries (US$3.2 per day 2011 purchasing power the households identified as poor in 2011, 2013, and parity) is only behind Tajikistan in the Europe and 2015 were not poor in the previous period, which Central Asia region (considering only those coun- shows considerable movements in and out poverty tries with available data) and higher than in neigh- (figure 2.12). Among the non-poor, there is greater boring Armenia, a country with a similar level of stability from one period to the next, but still close gross domestic product (GDP) per capita. Georgia to one-fifth of the non-poor in one period fall into is also poorer (that is, it has a higher incidence of poverty in the next.5 poverty) than other lower middle-income country Third, while overall inequality has declined, peers, despite having a higher GDP per capita in there are persistent welfare disparities across geo- some instances.3 graphic domains. Inequality, as measured by the Second, close to half of the population remains Gini coefficient, fell from a peak of 40 points in vulnerable to falling into poverty. With the decline 2011 to close to 36 in 2016 (based on the consump- in absolute poverty, there has been a corresponding tion aggregate used for international poverty com- increase in the country’s middle class, which grew parison). Nonetheless, inequality is still among the from roughly 12 percent in 2009 to 30 percent in highest in the Europe and Central Asia region and is 2015.4 However, the share of the population that is evident along geographic and demographic dimen- vulnerable—where vulnerability is defined as hav- sions. For instance, regions located in the eastern ing a probability of falling into poverty larger than parts of the country surrounding Tbilisi have pov- a low threshold of 10 percent—hovered between 47 erty rates considerably higher than in the western and 54 percent of the population during this period regions or in Tbilisi. Similarly, along the urban-rural (figure 2.11). High vulnerability implies that small divide, the gap between rural and urban poverty shocks can push many households into poverty. rates has broadly been stable over the past decade, 18 Georgia: From Reformer to Performer FIGURE 2.10 FIGURE 2.12 Poverty Is Still High by Regional and Global Standards Moving out and Back into Poverty: Distribution of the Poverty estimates at US$3.20 per day, selected countries, PPP Poor and Nonpoor Tajikistan (2014) Poverty status in the earlier period, 2009–15 Kyrgyz Republic (2015) 2009 Poor Georgia (2015) Nonpoor Armenia (2015) Romania (2012) 2011 Poor Albania (2012) Nonpoor Bulgaria (2012) Greece (2012) 2013 Poor Vietnam (2014) Nonpoor Mongolia (2014) Nicaragua (2014) 2015 Poor Bolivia (2015) Nonpoor El Salvador (2015) Sri Lanka (2012) 0 10 20 30 40 50 60 70 80 90 Percent Bhutan (2012) Poor in previous period Nonpoor in previous period 0 10 20 30 40 50 60 Source: Adapted from Tiwari and others 2017. % of population Note: The definition of the middle class follows Lopez-Calva and Ortiz-Juarez Europe and Cental Asia East Asia and the Pacific (2014). The underlying data draws from the WMS, which is a panel survey of Georgian households. The aggregate poverty numbers may not align exactly with Latin America and the Carribbean South Asia the official numbers, which are calculated using data from the IHS database Source: World Bank staff calculations based on data from the World Bank Global (GeoStat). Poverty Working Group database. Note: Countries included are European and Central Asian countries with poverty higher than 3 percent and other lower-middle-income countries with poverty levels lower than Georgia in 2015; PPP = purchasing power parity, 2011 prices. Poverty is mainly rural, and poverty levels observed in Tbilisi are substantially lower than in most other parts of the country. This is not surprising, as cit- FIGURE 2.11 ies have been the main beneficiaries of the gains in The Poor, the Vulnerable, and the Middle Class 2009–15 welfare in the past 15 years, while rural areas lagged behind. The poor tend to have lower levels of edu- 60 cational attainment, to be self-employed as agricul- 50 tural workers in rural areas, or unemployed in cities. 40 Female-headed households have a higher likelihood Percent 30 of being poor and/or belonging to the poorest 40 20 percent. Rural households with an unemployed head 10 have the highest poverty rate, with more than half 0 of this group living in poverty (World Bank, 2016). 2009 2010 2011 2012 2013 2014 2015 Elderly households living off pensions are protected Poor Middle class Vulnerable from poverty, but households with dependents— Source: Adapted from Tiwari and others 2017. children under the age of 18 or elderly over 65—have Note: The definition of the middle class follows Lopez-Calva and Ortiz-Juarez (2014). The underlying data draws from the WMS[[PI: Please provide meaning.]], a higher poverty rate (35 percent) than those with- which is a panel survey of Georgian households. The aggregate poverty numbers out dependents. The poor live in larger households may not align exactly with the official numbers, which are calculated using data and, particularly in rural areas, have a larger number from the IHS database (GeoStat). of children in the household. With high remaining poverty levels, rekindling at an average of around 8 percentage points. While the jobs engine will be key. The analysis of pov- some differences in welfare across space are to be erty trends and drivers reveals that growth failed to expected in any country, persistent gaps potentially benefit the poor, where it was not accompanied by signal a chronic lack of economic opportunities in employment creation. Since labor market opportuni- lagging regions (figure 2.13) combined with limited ties have been the only reliable ticket out of poverty, mobility for these populations. a key priority is to ensure that the country not only Eradicating poverty will require targeting grows, but that it does so in a manner that also gives efforts on the groups where poverty is entrenched. more Georgians access to productive employment. Chapter 2: Progress on Poverty and Shared prosperity 19 FIGURE 2.13 Poverty Rates Vary across Space in Georgia % of population, 2016 High Low Samegrelo-Zemo Svaneti (18.4) Abkhazia Racha-Lechkhumi and Kvemo Svaneti and Imereti Mtskheta- (19.4) Mtianeti (39.5) Guria Shida Kartli (18.6) (32.6) Ajaria (26.8) Samtskhe- Javakheti Kakheti (11.8) (25.8) Kvemo Kartli (30.9) Tbilisi (13.7) Source: World Bank Group staff calculations using data from the IHS database (Geostat). A twin challenge is to address widespread vul- country poverty line of US$3.20 per day in 2011 PPP. The nerability. The significant amount of vulnerability in other global poverty lines that are reported by the World Bank are US$1.90 per day for low-income countries and the population, as evidenced by the churning around US$5.50 per day for lower middle-income countries. the poverty line, suggests that major structural bot- Georgia was ranked as upper middle-income in 2016 but tlenecks remain in the economy. Moreover, the pat- was downgraded in 2017. tern of growth observed in recent years appears to 4. The definition of the middle class used follows the have been insufficient to overturn an uneven land- risk of falling into poverty approach as described in Lopez- scape of economic opportunities that excludes large Calva and Ortiz-Juarez (2014). The method entails using panel data to estimate probabilities of falling into poverty segments of the population from being productive for households between two periods and identifying those and contributing to overall growth. with a sufficiently low probability of falling into poverty as belonging to the middle class. 5. Tiwari and other (2018). Notes 1. Kazakhstan 2009–13: bottom 40 percent welfare References annual growth is 8.94 and average welfare annual growth is 7.56; Russian Federation 2007–12: bottom 40 percent López-Calva, Luis, and Eduardo Ortiz-Juarez. 2014. “A welfare annual growth is 5.86 and average welfare annual Vulnerability Approach to the Definition of the Middle and 5.27. Class.” Journal of Economic Inequality 12 (1): 23–47. 2. Female-headed households are more likely to be OECD (Organisation for Economic Co-operation and older, with an average age of the head of 65 years of age, Development). 2016. Programme for International compared with 57 for male-headed households. Rural Student Assessment (PISA) 2015: Results in Focus. Paris: households headed by women have the oldest heads at 70 OECD. years of age on average, compared with 59 for men. Tiwari, Sailesh, Cesar A. Cancho, Moritz Meyer, and Alan 3. Earlier, the global poverty line applicable to Georgia Fuchs Tarlovsky. 2018. “South Caucasus in Motion: used to be US$2.50 per day in 2005 purchasing power par- Economic and Social Mobility in Armenia, Azerbaijan, ity (PPP). But with the 2011 PPP adjustments now avail- and Georgia.” Policy Research Working Paper 8329, able, the relevant poverty line is the lower-middle-income World Bank Group, Washington, D.C. CHAPTER 3 SUSTAINING GROWTH AND CREATING JOBS In order to continue on its path toward prosperity, Georgia needs to maintain its growth rate at or above 5 percent. At this rate, by 2030, Georgia will eradicate extreme poverty and Georgians will be twice as well-off as they are today. However, continued growth will not come from domestic demand and low-hanging productivity gains, but from boosting export orientation and addressing horizontal productivity constraints. Findings Recommendations • Given population trends, Georgia will not be able • To boost productivity, Georgian firms will need to in- to rely on higher labor force participation solely to tegrate into global value chains (GVCs) by attracting boost growth. foreign direct investment (FDI) and resolving logis- tics bottlenecks. • Barring an unrealistic increase in the savings rate, total factor productivity (TFP) growth will be key to • Georgia has an opportunity to add dynamism to its future economic growth, as will boosting the skills lagging rural economy by modernizing agriculture of current and future workers. and leveraging tourism potential. • Four sectors—tourism, commercial agriculture, tex- tiles and apparel, and hydropower—display high potential as drivers of export-led growth. • Trade logistics, connectivity, and human capital re- main important productivity constraints. Progress on Poverty and Shared Prosperity 21 Lia Aleksishvili, a resident of Telavi in Kakheti region, remembers when her currently bustling bakery was only a small grocery store that could barely sustain herself alone. Over the years, she has managed to transform the small shop, which was struggling to make ends meet, into a successful local bakery. The expansion of her business has been benefi- cial not only to herself, but also to the community, because as her enterprise grew so did the amount of effort required to run it. Currently, Lia’s bakery employs four full-time work- ers and, when the holiday season arrives and the demand for desserts and pastries is at its highest, she employs four addi- tional workers part-time. This could have been a satisfying end to a success story. However, in the true spirit of entre- preneurship, Lia also managed to invest the profits from her business into renovating the second floor of her bakery, turning it into a bed and breakfast to capitalize on the rising number of tourists. 22 Georgia: From Reformer to Performer The first and foremost challenge for Georgia is to high in Georgia—for exporting companies. With sustain high rates of economic growth. Georgia does more FDI and larger firms, productivity will rise. not have a growth problem per se: given its unique • Logistics remains a core bottleneck. Georgia’s demography, Georgia would do well by maintain- ability to boost trade and attract FDI is under- ing the average growth rate of the past decade going mined by weak logistics. In today’s economic world, forward, as this would translate into significant per which is dominated by GVCs, timely and high- capita gains. If its economy grows at an average rate quality delivery is more important than cost, and of 4.5 percent, this performance would result in per Georgia urgently needs to do better on this front. capita growth of 5 to 6 percent, and thus in a dou- An important weakness is Georgia’s lack of adequate bling of living standards by 2030. But this will not be financial integration. easy and the pathways followed to date will need to be recalibrated. In seeking greater trade integration, Georgia To grow continuously and sustainably at or needs a comprehensive strategy. The country has above 5 percent, Georgia will need to reorient its a good base to build upon. Trade with Turkey is economy. Until now, most growth has been driven growing, especially in apparel, tourism is booming, by domestic demand, boosted by remittances and and the trade agreement with the European Union capital inflows, and by leveraging “easy” productiv- (EU)—Deep and Comprehensive Free Trade Area— ity gains from sectoral reallocations and first-gener- has created an opportunity to bring Georgia’s sys- ation reforms. Henceforth, Georgia will need to tap tems into line with international standards. At the increasingly into external markets through boosting same time, history suggests that most trade between the production of tradables (expanding on earlier countries is with neighbors. Therefore, Turkey and success in tourism and apparel), and ensure that pro- the Russian Federation will remain Georgia’s most ductivity continues to improve through efficiency important markets for economic development. gains at the firm level. An additional challenge will be to make growth What Will Drive Growth in the Long Run? more inclusive, through job creation, including in rural areas. While economic growth has benefited To make economic growth more sustainable and Georgians via higher wages and more resources for double GDP per capita by 2030, Georgia needs to the state to redistribute, it has failed to create jobs on rebalance its economy from investment-led to pro- a scale sufficient to reduce unemployment signifi- ductivity-led growth. Given demographic dynam- cantly, or provide opportunities for under-employed ics, labor force growth cannot become a meaningful rural residents. Most job growth has taken place in driver of economic growth, even with higher labor traditional services rather than modern productive participation. Therefore, the two remaining potential sectors. Meanwhile, much of the gain made on social drivers of economic growth are capital accumulation outcomes has been achieved thanks to redistribution and productivity. In turn, if TFP growth remains at and social assistance, which mostly provide tempo- current levels, and assuming a gradual decline in the rary relief but little durable exit out of poverty. This current account deficit to keep external balances at has also come at a significant fiscal cost, and resulted sustainable levels, Georgia will not be able to double in an erosion of fiscal buffers, which must now its per capita GDP by 2030 without an unrealistic be rebuilt. increase in savings to 35 percent of GDP by 2030, What will it take Georgia to build on its strong against an average of 17 percent since 2000. However, foundation? To boost productivity, sustain high rates the target can be reached, with no additional savings of growth and create good jobs, Georgian firms will growth and lower rates of investment, if TFP growth need to tap into GVCs and foreign markets, includ- accelerates from 1 to 2 percent over the medium- ing digital and financial value chains: term (box 3.1). Productivity-enhancing reforms are critical to • Attracting FDI will be key. In the short term, achieve the required rates of long-term economic it is international companies that can provide the growth. While few countries have managed to scale and expertise to connect Georgian products to achieve TFP growth rates above 2 percent over the international markets. This is also the best strategy years, this is less than the rate of postreform TFP to reduce “discovery costs”—which are particularly growth experienced in Georgia during the 2000s. Chapter 3: Sustaining Growth and Creating Jobs 23 BOX 3.1 Growth Accounting: Why Raising Total Factor Productivity Will Be Key Using a long-term growth model, we The main conclusion is that raising higher rate of productivity growth, achiev- simulate what it would take for Geor- TFP will be key ing a doubling GDP per capita by 2030 gia to double its gross domestic prod- becomes possible (figure B3.1). uct (GDP) per capita by 2030. The model In a “baseline scenario, total factor Pro- FIGURE B3.1 assumes a gradual closing of the current ductivity (TFP) growth is kept constant at 1 percent per year (based on the 2011–15 Required Investment-To-GDP and account deficit and also factors in the average for Georgia). In this scenario, Saving-To-GDP Ratios to Double shrinking labor force. More specifically the reaching the growth target would require GDP per Capita by 2030 model calibrations include: Model output simulation 2, to achieve 4.8% a higher level of investment from around GDP per capita growth rate • A gradual decline in the current 30 percent currently to over 40 percent by account deficit from 11 percent of GDP 2030, which in turn would require an unre- 45 currently to 5 percent of GDP by 2025 alistic increase in the savings rate. 40 Percent and going forward. In an alternative scenario, where TFP 35 • A decline in the labor force by about 15 growth increases to 2 percent by 2025, percent between 2015 and 2030, based Georgia can double its GDP per capita 30 on current population projections and a by 2030 with no additional savings. The 25 stable labor force participation rate. required level of investment moderates 2015 ‘20 ‘25 ‘30 • Average annual GDP per capita growth from 30 to 26 percent, which requires sav- Baseline (Business-as-usual) rate of 4.8 percent, the rate required to ings rates similar to historical values of Scenario (2% TFP growth rate) double GDP per capita by 2030. around 20 percent of GDP. Hence, with a Source: World Bank Group staff calculations. However, replicating that performance (which was FIGURE 3.1 in part achieved at a time of economic restructuring Dynamics of Exports and factor reallocations) would require a significant a. Goods and services, Georgia increase in export orientation to allow productive 5 firms to grow and to boost competition in the mar- 4 ket. The remainder of this chapter identifies poten- US$ billion tial drivers of productivity growth at the level of the 3 economy, firms, and individuals. 2 1 Unleashing New Sources of Growth through Integration into Global Markets 0 2000 2003 2006 2009 2012 2015 A higher rate of productivity growth could be Goods Services achieved by increasing Georgia’s export orienta- tion. Since Georgia does not have substantial natu- b. Total goods and services, Georgia and comparators ral resources or a large domestic market, future GDP 100 growth and job creation will hinge on its ability to 80 produce and sell goods and services competitively in % pf GDP the global marketplace. 60 Successful countries have integrated their econ- 40 omies with the rest of the world. Small countries with fewer than 10 million people need exports to 20 rise to at least 50 percent of GDP if they are to avoid 0 a ‘middle-income trap’. Georgia’s total exports of 2000 2003 2006 2009 2012 2015 goods and services have expanded over the past 15 Georgia Estonia Czech Republic years, rising from 23 percent of GDP in 2000 to 45 Source: World Bank staff calculations based on data from UN Comtrade and IMF percent in 2015 (figure 3.1). Nonetheless, Georgia’s Balance of Payments Statistics. 24 Georgia: From Reformer to Performer exports are well below those of more advanced peers, TABLE 3.1 such as Estonia and the Czech Republic, whose Georgia’s Exporting Firms exports are equivalent to about 80 percent of GDP. a. Total number Slovakia increased its exports-to-GDP ratio from 45 percent (in the early 1990s) to 93 percent today. 2003 2006 2009 2012 The number of export-oriented firms has been No. of firms 1,177 N/A 1,462 1,835 increasing, albeit slowly. There were 1,177 export- No. of destinations 80 98 99 112 ers in 2003, and 1,835 in 2012, revealing substantial No. of products 1,100 1,497 1,584 2,024 net entry (table 3.1). Net entry contributed to more than half of export growth during 2009–12, with the b. Average for all exporters rest stemming from diversification along the market dimension. In 2012, on average, exporters reached 2003 2006 2009 2012 two to four destinations, with four to five products, No. of destinations 1.63 1.51 1.86 1.88 diversifying from their patterns in 2003. However, No. of products 2.6 2 3.79 4.46 most exporters were relatively small, with 40 percent of firms exporting only one product to one destina- Source: Adapted from World Bank (2013) using data from Geostat. tion, and low chances of survival (table 3.2). The composition of Georgia’s export basket TABLE 3.2 has not evolved in a significant way. Georgia has Export Survival Probabilities increased its market reach from about 60 destina- tions in the early 2000s to more than 100 in the early 1 year 2 years 5 years 2010s, exporting around 2,000 product varieties (figure 3.2). While this is better than Armenia and Slovenia 59.1 42.0 23.6 Azerbaijan, there is still substantial scope for fur- Hungary 54.6 37.3 19.2 ther diversification, as demonstrated by the better Serbia 48.9 30.4 13.9 performance of small and former transition econo- Bosnia and Herzegovina 47.8 29.2 13.4 mies currently members of the EU (Czech Republic, Moldova 45.9 26.9 11.4 Slovakia, and Lithuania), or associated through Albania 38.9 20.7 7.1 a trade agreement (Bosnia and Herzegovina and Georgia 39.5 19.9 5.5 Serbia). Resource-based products such as minerals Armenia 36.8 16.8 5.0 and metals, and the re-exports of used cars, are still Source: Adapted from World Bank (2013) using data from Geostat. dominant. In 2015, Georgia exported competitively 30 agribusiness products accounting for about one- FIGURE 3.2 quarter of total merchandise exports (see appendix Diversification of Merchandise Exports I). The only new competitive exports in the manufac- turing sector included apparel (11 product groups, 6 250 Czech Republic percent of the total merchandise exports) and medi- Slovakia caments (one new product group, 5 percent of the 200 Latvia Slovenia No. of markets reached total merchandise exports). The export of services, Lithuania while growing, has been limited to tourism, which is 150 Georgia currently the most dynamic export sector in Georgia. Azerbaijan Serbia Transport services exports grew very modestly and Bosnia and Herzegovina other business services, such as telecommunications 100 Moldova and IT, finance and insurance and other global ser- Armenia vices, maintained negligible export shares. 50 The survival of firms in export markets is a challenge. Georgian firms, as those in Armenia and 0 Albania, have low survival chances in the global mar- 0 1,000 2,000 3,000 4,000 5,000 ketplace. Out of 100 export flows that start in a given No. of products exported year, only 40 remain active after the first year, two Source: World Bank staff calculations based on data from UN Comtrade and IMF years later, 20, and just five at the end of the fifth year. Balance of Payments Statistics. Chapter 3: Sustaining Growth and Creating Jobs 25 This reveals that firms explore markets and opportu- FIGURE 3.3 nities through trial and error, and with highly imper- GVC Integration, 1996 and 2011 fect information, before entering export markets. Share of Georgia’s value added in foreign exports To lower “discovery costs,” attracting FDI will be critical. Scarce information on business opportuni- Share of foreign value added in Georgia’s exports ties, the specificities of exporting to a given country, foreign consumers’ preferences, or the regulatory 0 5 10 15 20 25 30 complexities associated with serving foreign markets Percent may be limiting the growth potential of firms and 1996 2011 affecting export survival. Initiatives to make infor- Source: World Bank staff calculations based on data from UNCTAD-EORA GVC database. mation more easily available to firms can be a use- ful step. Experience suggests, however, that attracting foreign investment is key. In the hazelnut sector, the FIGURE 3.4 presence of the Italian firm Ferrero set the example Global Market Shares to hazelnut producers that it was profitable to export Georgia and comparators, 2000 and 2015 this product. The State Partnership Fund, with the Final apparel and footwear U.S. Agency for International Development support, 2000 mobilized farmers to export tangerines, providing 2015 information and financial resources to improve the Final electronics 2000 parameterization and packaging of fruit, and intro- 2015 ducing ‘consolidators’ that buy from several farmers Final textiles and put together the produce, so that a minimum 2000 2015 efficient scale is reached. Final vehicles (pass+comm) For small economies, GVCs can be powerful 2000 platforms for integration. Georgia’s backward GVC 2015 integration—measured by the portion of foreign Intermediate apparel and footwear value-added embedded in a country’s exports—has 2000 2015 been increasing, albeit from very low levels. This sug- Intermediate vehicles gests that Georgian firms increasingly rely on foreign 2000 intermediates in order to produce for export. The 2015 sharp increase in tourism exports over the period, 0 1.5 3.0 4.5 along with that of other downstream merchandise Percent sectors such as garments, explains this increase. Georgia Armenia Moldova However, the share of Georgia’s exports that ends up Source: World Bank Group staff calculations based on UN Comtrade. in foreign exports—forward GVC integration—was at 26 percent in 2011, down from about 30 percent in 1996 (figure 3.3). It is in textiles and apparel that implementing international standards (see box 3.2 firms have most successfully managed to integrate for policy priorities). with international production networks. For agri- business exports, the share of Georgia declined from Firm-Level Constraints 0.18 percent in 2001 to 0.02 percent in 2015. This is a concerning development, given the country’s Despite positive recent trends, Georgia remains far strong comparative advantages (see section on firm from the productivity frontier. Firm-level analysis level constraints). shows that productivity has been growing because of Georgia has significant underleveraged poten- productivity increases by individual firms (the dis- tial for export-led growth. For Georgia to reach tribution of productivity shifted to the right), and of higher levels of income, it needs to succeed in gen- productivity dispersion narrowing mildly. This sug- erating international “breakthroughs” in key sectors. gests an improvement in resource allocation toward The Systematic Country Diagnostic analyzed four the most productive firms. However, comparisons sectors in which Georgia has great export potential with peer economies show that there is still signifi- if it maintains reform momentum and succeeds in cant scope to boost productivity growth further. 26 Georgia: From Reformer to Performer BOX 3.2 In Which Sectors Can Georgia Boost Its Export Potential? Agriculture tage sites. With an overwhelming number of historical monu- ments and a limited budget, some sites are neglected. This The agrifood industry has considerable untapped potential. calls for introducing “site management plans”, training local It has strong commercial potential, thanks to fertile land, favor- professional staff and improving supporting infrastructure. able agro-climatic conditions, ample water resources and unique • Expanding hospitality training, particularly in rural areas traditions. Growth opportunities stem from the rapid expansion and focusing not only on the needs for relatively well-estab- of high-value fruit and vegetable consumption in traditional Com- lished product offerings, but also of other promising market monwealth of Independent States markets, as well as improved segments. access to the European Union (EU) and Chinese markets. • Tourism-related infrastructure, including affordable, qual- ity hotels and connectivity infrastructure (domestic connec- Policy priorities for the sector would therefore include: tions along touristic circuits and international air connections).a • Land market development. While smallholder farming can be efficient, formalizing/legitimizing land property rights will Energy be fundamental for attracting greater investment. With vast hydropower potential and a favorable location, • Cooperation among smallholders on service provision, Georgia could become an energy hub. The country has large product consolidation, processing, branding, and marketing to unexploited hydropower potential, which could generate signifi- reach efficient scale. cant export receipts.b It also has a significant locational advan- • Compliance with food safety and quality standards. tage to exchange power between energy producers, such as Azer- Georgia has invested heavily in building the capacity of the baijan and the Russian Federation, with energy consumers such National Food Agency, harmonizing food safety legislation as Turkey and Armenia. with EU legislation in line with the Deep and Comprehensive Free Trade Area (DCFTA), and developing disease control strat- Policy priorities for the sector would include: egies. However, ensuring compliance will be a challenge. • Addressing underlying failures in agro-credit market. • Power market development, including introduction of the Promoting supplier finance, while making efforts to reduce short-term market, balancing and ancillary services market. risks in agriculture would pave the way for farmers’ engage- • Public-private partnership (PPP) frameworks. Creating ment with commercial banks in the longer term. an enabling framework and/or structures for PPPs, so the pri- • Value-chain infrastructure, including storage and sort- vate sector can attract the needed investment in grid infra- ing facilities. structure, while at the same time heightening scrutiny over • Public-private dialogue to inform strategy and actions the potential contingent liability that PPP projects entail. for agriculture development and promote greater pro- • Regulations for cross-border trade. Regulations that are ducer-buyer coordination. In the medium-term, these could particularly important for cross-border trade are those around evolve into industry associations to support export promotion, grid connection. The cross-border capacity allocation rules are standard setting, and industry compliance. currently being clarified, but some concerns remain about the development of the Turkish grid. To address this and other bar- Tourism riers to regional power trade, Georgia and Turkey will need policy decisions and a roadmap with coordinated measures. Georgia’s tourism sector is a major contributor to gross • Strengthen incentives to reduce technical and com- domestic product, exports and employment but faces con- mercial losses in distribution. Currently, transmission and straints to further expansion beyond traditional markets. distribution tariffs are regulated according to the cost-plus Between 2009 and 2016, Georgia achieved one of the fastest principle, so distribution companies have limited incentives for rates of tourism growth globally. Nonetheless, it still struggles to reducing losses and improving efficiency. attract tourists from outside the region. Moreover, the sector still • Environmental and social impact assessments. A more relies heavily on foreign inputs and could do better in integrating systematic assessment of environmental and social impacts domestic suppliers. is needed, including the cumulative impacts from the develop- Policy priorities for the sector include: ment of multiple hydropower plants in the same river basin. • Regulatory controls to ensure compliance with: (i) minimum Apparel standard expectations of larger international tour operators; (ii) demands of certain segments such as third-age travelers; Textiles and apparel firms have been successful in inte- and (iii) requirements for soft adventure markets where safety grating into international production networks and the standards are important. • Standardized visitor management processes for heri- (Box continues next page) Chapter 3: Sustaining Growth and Creating Jobs 27 Box 3.2. (continued) challenge is now to move up the value chain. The challenge with key trading partners through deep agreements is also cru- is twofold: remaining price competitive to be able to serve more cial. An example of a deep agreement is the DCFTA signed than one destination, and moving up the low margin cut-make- with the EU. With other partners, Georgia could benefit from trim activities into fashion design, introducing new styles and deepening its integration efforts into services and investment, quality labels, targeting high-end users. as they play a key role in the economy’s competitiveness and specifically on textiles and garments. For firms that focus on Policy priorities for the sector would therefore include: original design and display small scale, leveraging alternative business and distribution models (for example, e-commerce • Sector specific skills programs, to encourage on-the- platforms catering to foreign clients) would be critical. job training to foster cluster-wide externalities, as well as strengthening vocational education, particularly with a focus a.  Peru’s experience with developing its gastronomical/tourism corridor could provide on textiles and apparel and connected activities, and new a useful example of a successful implementation of the tourism strategy. Peru shares skills related to digital drawing, printer operations and tem- many of the challenges with Georgia, including the mountainous landscape and isolated communities. plate-making.c b.  Estimated at conservative price of US$0.06 per kilowatt hour. • Logistics and standards. In addition to improving logistics, c.  Firms also mentioned that in cut-make-trim segments, where margins are tight, reducing trade costs, and ensuring harmonization of standards exchange rate volatility appears to be an obstacle. Firms Are Mostly Small and Informal FIGURE 3.5 Less Dispersion and Some Growth in Georgian Firms’ Productivity To become more productive, firms need to be able Georgia and comparators to grow and formalize, and Georgia has had mixed 1.1 results on this front. Firm size has been decreasing 1.0 during the past decade, mostly for good reasons. 0.9 First, the privatization of state-owned enterprise 0.8 (SOEs) has presumably forced some restructuring of 0.7 Density large inefficient SOEs, leaving the smaller and more 0.6 0.5 productive ones in the market. Second, reforms in 0.4 the business environment have allowed more private 0.3 firms to enter and new firms start small. In recent 0.2 years, employment growth has accelerated over 0.1 the life-cycle of firms. The growth rate of employ- 0 ment across firms of different ages was flat in 2007, 0 1 2 3 4 and progressively increased thereafter. For example, Efficiency levels a typical five-year-old firm was as large as it was at Georgia (2008) Slovakia (2009) Armenia (2013) birth in 2007, but twice as large in 2014. This sug- Georgia (2013) Slovakia (2013) Czech Republic (2013) gests that firms manage to secure labor and finan- Source: World Bank staff calculations based on World Bank’s Enterprise Surveys. Note: Productivity estimate is based on a production function on output that includes materials, cial capital as profit opportunities arise, including capital and labor as regressors. through making use of the “Produced in Georgia” program and probably also thanks to improvements in the investment climate. in a handful of sectors such as foodstuffs, retail and However, many firms still operate in the infor- wholesale, construction and hotel and restaurant mal sector, with limited opportunities for growth. sectors. Due to land fragmentation (in the first sec- The introduction of preferential tax regimes for tor) and low managerial capabilities (in the rest), Georgian micro and small businesses made it easier it is likely that the scope for firm growth is limited, for micro firms to file taxes (they were exempted and therefore the costs of formalizing may outweigh from income tax) and it induced a sharp and one- the benefits. This conjecture should be subject to time-only increase in the number of registered firms future research. by 27 to 41 percent (Bruhn and Loeprick 2014). This While formal firms do grow, those in the infor- suggests that informal firms registered at that time. mal sector do not. The substantial growth dynamics However, informality appears to remain prevalent outlined above hold mostly for formal firms. In stark 28 Georgia: From Reformer to Performer FIGURE 3.6 A Twin Challenge: Sustaining Formal Firm Growth and Tackling Informality Natural process of downsizing linked to: Formal firms have Challenges going • SOE restructuring grown in recent years forward • DB reforms and entry 1 Maximize formal firms’ growth potential Firm size 2 Support informal firms’ transition out of informality Informal firms are on a slow growth trajectory Transition years Time Informal firms Formal firms Source: Georgia SCD team. contrast, individual firms tend to stay small over inputs (including credit, labor, and technology), their life-cycle. Given the prevalence of informality while inefficient firms should be allowed to fail. in Georgia, a major share of the economy is thus still Although Georgia has a competition regula- dominated by undynamic firms. tory and institutional framework in place since Going forward, policymakers will need to prior- 2012, the degree of competition remains low, espe- itize not only support to small and medium enter- cially compared to peers. According to the World prises (SMEs) but also growth and formalization. Economic Forum’s Global Competitiveness Report Subsidies and regulatory favors to small business (2016–17), perceptions of competition in Georgia can constitute incentives to stay small and, in many are weak, particularly with regard to the effectiveness cases, inefficient. In a healthy economy, it should be of its antimonopoly policy (3.1 out of 7 points) and easy for entrepreneurs to start companies, the best the extent of market dominance (3.6 out of 7 points) of which should be able to grow, thereby benefit- (figures 3.7 and 3.8). In turn, key sectors, such as ing from fair competition and access to the required manufacturing, exhibit market structures prone to FIGURE 3.7 FIGURE 3.8 Effectiveness of Anti-Monopoly Policy Extent of Market Dominance Georgia and other European and Central Asian Countries Georgia and other European and Central Asian Countries Top 5 Top 5 Turkey Poland Poland Tajikistan Macedonia, FYR Armenia Tajikistan Turkey Azerbaijan Bulgaria Bulgaria Russian Federation Armenia Romania Russian Federation Macedonia, FYR Kazakhstan Kazakhstan Montenegro Azerbaijan Croatia Georgia Romania Kyrgyz Republic Bosnia and Herzegovina Montenegro Kyrgyz Republic Ukraine Albania Croatia Georgia Bosnia and Herzegovina Serbia Albania Ukraine Serbia 0 2 4 6 0 2 4 6 Percent Percent Source: Adapted from WEF 2016. Source: Adapted from WEF 2016. Chapter 3: Sustaining Growth and Creating Jobs 29 anticompetitive behavior with almost 10 percent of FIGURE 3.9 monopolies, a larger share than in regional peers Global Competitiveness Index: Business Sophistication Pillar rank, 2016 such as Armenia, the Russian Federation, Ukraine, or Kazakhstan; and almost 70 percent of the markets have six firms or less. Firm Capacity and Sophistication Are Also Low Georgian firms are still unable to produce at scale, and to high standards of quality and reliability. The most problematic factors include: (i) insuf- ficient quantity and quality of local suppliers; (ii) limited cluster development; (iii) reliance on basic labor-intensive processes with limited use of tech- nology; and (iv) traditional managerial practices and Source: World Economic Forum. marketing skills. The challenges of underdeveloped supply networks and clusters, as well as the limited FIGURE 3.10 uptake of the latest technologies, are likely to be Share of Firms with an Internationally-Recognized linked to Georgia’s limited participation in global Quality Certification, 2013 and regional value chains, and the limited inflow of efficiency-seeking FDI. Georgia’s capital market is Hungary nascent and, therefore, companies do not experience Slovak Repulic Czech Republic market pressure to demonstrate greater corporate Romania transparency and efficiency. Banks do not demand Poland better corporate governance practices from their cor- Estonia porate borrowers, possibly as a result of their privi- Armenia leged position vis-à-vis other creditors in case the Georgia Europe and Central Asia company falls into financial distress. Georgian companies are characterized by lim- 0 10 20 30 40 50 Percent ited innovation. Only 7 percent of respondents in the Source: World Bank and the European Bank for Reconstruction and Development World Bank Entrepreneurship Survey (2012) indi- Business Environment and Enterprise Performance Survey. cated that they had introduced a new or improved product to the market, compared with two-thirds Investment is going overwhelmingly toward in Armenia. No products or services were new to ‘hard infrastructure’ and less so to the firm-level. the world in the Georgian sample, compared with Gross fixed capital formation has been relatively high, 3 percent in the Armenian sample. In Georgia, the averaging 25 percent of GDP during 2000–16. Much main objective of introducing a new product or ser- of this investment went to finance improvements in vice was to increase domestic sales in existing market backbone infrastructure and services, such as roads, segments, and to diversify the product mix for the airports, broadband, telecom, energy generation and domestic market. The most common area for intro- transmission, and financial services. Georgia was duction of new products or services was in methods successful in attracting sizable FDI in infrastruc- of manufacturing, and the least common area was ture and the financial sector. However, investment logistics, supply chain, and delivery or distribution in manufacturing has been lagging. While industry methods for inputs, products, or services. Industry accounted for about one-third of total investment relevant skills are reported to be scarce, and research in 2007–15, this was mostly in the energy sector and and development uncommon, even in high-growth comparatively less in processing sectors firms (with firms. Only a very small share of Georgian firms has export potential). an internationally recognized quality certification— Investment policy needs to be refined and refo- just 8 percent of Georgian firms compared with 29 cused on attracting efficiency-seeking investments percent in Estonia, 24 percent in Armenia, and 50 in high value-added tradable sectors. Georgia’s percent in Hungary. ability to attract and retain more export-oriented, 30 Georgia: From Reformer to Performer FIGURE 3.11 FIGURE 3.12 FDI by Sector, 2007–15 (US$ million) Investment in Fixed Assets, 2007–15 Transport and communication Industry 31% 28% Agriculture 3% Wholesale TOTAL: and retail Other GEL 27.8 trade 3% billion 11% Hotels and restaurants 3% Healthcare Construction and Education Real estate 8% 5% 8% Source: World Bank staff calculations based on data from Geostat. Source: World Bank staff calculations based on data from Geostat. efficiency-seeking investment in higher value-added been largely addressed, there are inefficiencies in the segments remains low. Therefore, it is important to energy system and insufficient transmission capacity refine investment policies and incentives to bring for energy exchange. Internet access has been rising more investment into high value-added export-ori- but rural areas are poorly connected, which is impor- ented sectors. tant for the competitiveness of the tourism sector (booking, advertisement, and payments, and so on). Removing Horizontal Productivity Transport Constraints Georgia has demonstrated major achievements in improving transport connectivity, but gaps remain. To unleash private sector growth and ensure that The national highway system and railway routes have integration is its driving force, sector-specific poli- expanded. There are three international airports and cies need to be complemented by economy-wide, two international seaports/terminals. Border clear- or horizontal, interventions. The discussion below ance procedures have been fundamentally stream- identifies the most binding economy-wide con- lined. The port sector is open for private sector straints and proposes some options to alleviate them. participation and the commercial air transport sec- tor is fully liberalized. Nonetheless, many challenges Hard and Soft Infrastructure: Transport and remain, including poor quality of logistics services, Information and Communication Technology insufficient capacity of major transport corridors and airports to accommodate increasing traffic, sea- Georgia remains poorly connected internally and sonal port congestion, and lagging connectivity in with the rest of the world, undermining its aspira- regions and rural areas. Further strengthening the tion to become a regional transit hub. The Global transport infrastructure and related services will also Competitiveness Index ranks Georgia’s infrastruc- require improvements in public investment manage- ture relatively high at 65th position, which is above ment and new financing mechanisms. that of countries at similar income levels. However, The limited capacity of transport infrastructure, the aggregate ranking masks significant differences coupled with a relatively challenging geographic in quality across different types of infrastructure. location, is reflected in Georgia’s poor performance While Georgia scores relatively high on quality of in the World Bank Group’s Logistics Performance railroad infrastructure (35), telephone lines (46) and Index (LPI), although from a trade facilitation per- mobile-phone coverage (48), its air transport capac- spective Georgia has made important progress. Two ity is very low (99), the quality of air transport infra- elements determine how costly it is to bring goods structure is the worst in the South Caucasus (88), the to markets. First, transportation costs, driven by quality of roads is lagging (78), and so is that of port infrastructure and the efficiency of logistics provid- infrastructure (71). While electricity shortages have ers. Second, policy-induced costs of moving goods Chapter 3: Sustaining Growth and Creating Jobs 31 FIGURE 3.13 FIGURE 3.14 Global Competitiveness Index: Infrastructure, 2016 Logistic Performance Index, 2016 Mobile telephone Overall LPI Fixed telephone lines Customs Electricity supply Infrastructure Air transport capacity International Airports shipments Ports Tracking and tracing Railroad Timeliness Roads Logistics quality and competence 0 13 26 39 52 65 78 91 104 117 130 0 20 40 60 80 100 120 140 160 Rank Rank Georgia Estonia Armenia Georgia Estonia Armenia Moldova Source: World Economic Forum. Source: World Bank Group Logistics Performance Index. across the border, driven by barriers imposed at the insufficient to meet a rapidly increasing demand. border that include, for example, the complexity of Other bottlenecks include frequent delays at the customs procedures. The LPI is better suited to mea- Azerbaijan-Georgia border and the erratic opera- sure the first type of elements, revealing that Georgia tion of Caspian Sea ferries linking Baku with Aktau has scope for improvement. On the competence and and Turkmenbashi. quality of logistics services, for example, it ranks 146. Poor road network connectivity in regions and Trading partners have also stated that it is not easy to rural areas is a major constraint. At present, one- arrange competitively priced shipments (ranking 131 third of secondary and half of local road networks in this dimension), and that the trade and transport are in poor condition. Secondary roads are crucial infrastructure needs improvement (ranking 128). for commercial agriculture to become internation- Instead, performance indicators on policy-induced ally competitive, by connecting farmers to markets, trade costs, such as the Trading Across Borders index but this remains a challenge. Georgia is currently of Doing Business, place Georgia rather better. It was allocating only half of the budget required to reha- ranked 54 in 2017, with time to export and import bilitate and maintain its secondary and local road in the range of 14–15 hours—in the middle of the networks. In parallel, the government will have to distribution, although still far from top perform- complete implementation of the ongoing mod- ers such as Estonia or Moldova. The efforts made in ernization program for highways and railways and facilitating trade should be coupled with improved develop modern logistics. physical infrastructure in terms of roads, ports, and Enabling private sector participation in the road logistics services. sector will be important for the sector’s sustain- The potential gains from past and ongoing ability. There is a growing financing gap to sustain infrastructure investment in external connectivity investment in the road sector: around 75 percent are often lost due to delays and high costs incurred of investment in the sector is development partner- for the movements of goods within the country. financed and there is no private sector participa- Most of the existing warehouses are characterized tion. Total government revenue related to roads and by poor infrastructure conditions, outdated equip- transport is one-third road expenditure (including ment, low levels of service and extremely high stor- development partners financing). Therefore, it will age prices. Road shipments often face delays due be important to develop and introduce financing to frequent traffic accidents involving aged cargo mechanisms to sustainably finance the operation and trucks. Competition among many small transporta- maintenance of major commercial road corridors, tion companies has driven profit margins to very low such as the East-West Highway once it is completed. levels, preventing any one of them from renewing its Given the limited fiscal space, greater private invest- fleet. The most frequent impediment identified by ment is an option for the maintenance of second- logistics agents is the low availability and quality of ary and local roads, which are critical for reaping the railway rolling stock. Air cargo volumes remain the full benefits of the East-West Highway. However, modest and airport passenger capacity is becoming the rules of engagement with the private sector need 32 Georgia: From Reformer to Performer to be well defined to minimize potential contingent sector to understand when certain PPP mechanisms liabilities for the budget. can be used, develop PPP projects, analyze risks, and The institutional capacity to plan and manage returns, bring projects to the market, and supervise infrastructure initiatives will need to be strength- them throughout implementation. ened. The economic impact of public investment in infrastructure will greatly depend on the institutional Information and Communication Technologies capacity to prioritize, develop, and implement infra- Enabling connectivity and broad use of informa- structure projects. In the case of public-private part- tion and communication technologies (ICTs) is a nerships (PPPs), in addition to putting in place the high priority, as Georgia underperforms in this regulatory framework that appropriately balances important dimension of connectivity. Georgia risks between the public and private sectors, the gov- moved up in the Global Networked Readiness ernment will need to build capacity within the public Index—which rates current market conditions and the state of connectivity—from 88th position (out of 142 countries) in 2012 to 58th position (out of FIGURE 3.15 Global Networked Readiness Index 139 countries) in 2016. The country has achieved remarkable progress in increasing the affordability Affordability of ICT services, moving from 101st to 15th position. 2012 2016 Georgia has also achieved a notable expansion of ICT usage by government bodies (36 positions up), and Infrastructure improvements in the political and regulatory envi- 2012 2016 ronment facilitating ICT penetration (25 positions higher). Nonetheless, Georgia underperforms in sev- Business and innovation environment 2012 eral dimensions, including mobile network coverage, 2016 international internet bandwidth and secure internet Political and regulatory environment servers. Georgia has poor usage of ICT by businesses 2012 (108th, the worst-performing area) and the eco- 2016 nomic impact of ICT on competitiveness generated Networked readiness index by technological and nontechnological innovations 2012 in the form of patents, new products, processes, and 2016 practices, is weak (91st, the second-worst area). Social impacts Georgia’s broadband infrastructure cover- 2012 age remains below potential. Subscription to fixed 2016 broadband services is currently at 39 percent of Economic impacts households, mostly in large cities. Mobile broadband 2012 2016 subscriptions are at 38 percent of the population, the second-worst performance among benchmark coun- Government usage tries. Currently, the internet access market is com- 2012 2016 petitive, with five large private telecom companies and 2,015 licensed smaller internet service provid- Business usage 2012 ers that have regional or community-level networks. 2016 Together, these companies have rolled out multiple cable and/or fiber optic ‘backbone’ and access net- Individual usage 2012 works, and widespread wireless networks that con- 2016 nect cities, regions, and smaller communities where Skills the commercial case is viable. 2012 2016 Institutions: Capacity and Efficiency 0 20 40 60 80 120 Rank In the decade following the Rose Revolution, Geor- Georgia Armenia Moldova gia made dramatic improvements to its regula- Source: World Economic Forum. tory and institutional environment. The country Chapter 3: Sustaining Growth and Creating Jobs 33 achieved one of the lowest corruption levels in FIGURE 3.16 Europe and Central Asia, as measured by Transpar- Broadband Penetration, 2016 ency International’s Corruption Perception Index. Albania Over the past 20 years, Georgia was one of the top Armenia Azerbaijan three countries with the most significant improve- Bosnia and Herzegovina ments in four out of six dimensions of the World Georgia Bank governance indicators: control of corruption, Kosovo rule of law, regulatory quality, and government effec- Moldova tiveness. Its Doing Business ranking improved from Macedonia, FYR Montenegro 112th to 16th place out of 190 economies between Serbia 2004 and 2017. Turkey Nonetheless, capacity varies considerably across Ukraine and within institutions. Reform implementation 0 15 30 45 60 75 90 has not been consistent across the government, with Percent remarkable differences in administrative capac- Mobile broadband Fixed broadband ity. Government and development partners have Source: World Bank Group staff calculations based on TeleGeography Global focused on “easy-to-showcase institutions,” while Comms Database. others have been left out or have undergone insuffi- cient changes. In addition, the quality of staff within FIGURE 3.17 institutions is uneven. While key decision-makers in Mobile Telephony (Wireless) and 3/4G Mobile- the central government are generally very competent, Broadband Penetration, 2016 this is less true of personnel at lower technical levels. Albania Low capacity in local governments is also a source Armenia of concern. The population and business community Azerbaijan report that decision-making processes at all levels are Bosnia and Herzegovina highly centralized and hence inefficient in terms of Georgia Kosovo timeliness and quality. Moldova Capacity constraints and weak coordination Macedonia, FYR cause serious institutional deficiencies even in areas Montenegro where Georgia is doing well, such as the investment Serbia climate. These include deficient land markets, inad- Turkey Ukraine equate frameworks for firm exit and restructuring, insufficient investor protection and weak corporate 0 50 100 150 200 Percent governance (see appendix F). Mobile broadband Mobile telephony Source: World Bank Group staff calculations based on TeleGeography Global Credit: Access and Diversification Comms Database. The financial sector remains relatively shal- low and poorly diversified. Private financial sec- tor assets reached 101 percent of GDP in 2016 and improvements and growth, in terms of size, prod- domestic credit to the private sector increased from ucts, skills, and regulation. The capital market is 9 percent of GDP in 2000 to 62 percent of GDP in also underdeveloped. 2016. However, relative to Europe and Central Asia Access to credit remains a problem for SMEs. and Organisation for Economic Co-operation and While SMEs account for about 44 percent of total Development (OECD) averages, the financial sector employment, they generate about 20 percent of GDP remains shallow and access to finance continues to and account for about 20 percent of the total volume be problematic. The financial sector is dominated of loans provided by banks annually. Most SMEs by the banking sector, which is well developed, with continue to rely on family and friends for finan- the leading banks operating at international indus- cial resources, as they face high costs and collateral try standards and practices. The nonbanking sector requirements, and limited offerings of customized remains largely underdeveloped, at only 9 percent financial products. This restricts their ability to take of GDP, and has significant room for sophistication up profitable projects if substantial investments need 34 Georgia: From Reformer to Performer to be front-loaded. Value-chain financing, trade and in retail lending (21 percent of GDP in 2016) assets-based financing (including leasing, factoring), and real estate on the back of rapidly increasing preexport and export financing, and risk insurance household leverage. are uncommon. The existing credit market infra- • The banking sector is highly concentrated, with structure (pledge registry and credit reporting sys- the top two banks having a market share of tems) is not used effectively to reduce lending risks around 70 percent. This increases systemic risks to SMEs, while cumbersome business closure and for the economy due to the large concentration insolvency procedures create significant problems and undermines effective competition. for business exit and reentry. At the same time, the banks report limited SME demand for credit. Low domestic savings constrain financial deep- The banking sector has accumulated systemic ening and diversification. The absence of deposit vulnerabilities, which indirectly exacerbate access insurance and low trust in the national currency have to finance problems, while undermining over- encouraged consumption and real estate investment. all macro-financial stability. The banking sector High costs and capital weaknesses have severely is well capitalized, profitable, and the level of non- constrained insurance sector growth and the use of performing loans is not concerning. However, there insurance services, both for risk mitigation, as well are several structural vulnerabilities that need to as longer-term savings and social protection. Health be addressed: insurance (public and private) dominates the insur- ance market, while other products remain nascent. • Banks rely on external and local foreign-exchange Only a few companies offer agricultural insur- borrowing, which translates into high dollariza- ance, while vehicle insurance is not yet mandatory tion of assets and liabilities (figure 3.18). High (as required in the EU). Although pension insur- dollarization increases foreign-exchange risk ance products are offered by the two largest insur- for borrowers and induces higher credit and ance companies to large corporations and banks, refinancing risks for lenders. It also leads to sig- they remain underutilized by the rest of the market nificant price arbitrage and incentives for local due to insufficient incentives and regulation. The unhedged borrowers to borrow in U.S. dollars, as government expects to roll out pension reform and the funding cost in local currency is much higher. the introduction of contributory pension savings Foreign-exchange risks of business borrowers and in mid-2018. higher funding costs in local currency constrain Capital market development will be important the development of businesses, especially micro, to diversify sources of funding for the corporate small, and medium enterprises, and bring signifi- sector. The lack of institutional investors (such as cant market and stability risks. High dollarization pension funds) and weak corporate transparency also undermines monetary policy transmission discourage capital market development which, in mechanisms and constrains the development of turn, holds back the accumulation of domestic sav- the interbank lending market. ings. Insurance and pension savings total less than • The banks’ lending portfolio is concentrated 2 percent of GDP. Georgia does not have locally FIGURE 3.18 Share of Foreign Currency Denominated Loans and Deposits in Banks 85 80 75 Percent 70 65 60 55 Dec. 2006 Dec. '07 Dec. '08 Dec. '09 Dec. '10 Dec. '11 Dec. '12 Dec. '13 Dec. '14 Dec. '15 Dec. '16 Foreign-exchange loans (% of total loans) Foreign-exchange deposits (% of total deposits) Source: National Bank of Georgia and IMF Financial Soundness Indicators website. Chapter 3: Sustaining Growth and Creating Jobs 35 incorporated investment funds, although a hand- The overall poor quality of education is a major ful of foreign funds, the state-owned Partnership issue. Results from the 2015 PISA reveal that a major- Fund, and internationally funded equity programs ity of Georgian 15-year-old students scored below are active in the country. A modern investment basic proficiency in core skills. These poor aggre- fund legislation and regulation is yet to be devel- gate outcomes, moreover, hide significant variations oped, along with the legislation necessary to diversify across socioeconomic and spatial divides. investment instruments, including corporate and While employers flag skills as a significant con- asset-backed securities. straint, the biggest gaps appear to be in soft skills Financial sector diversification and deepening that affect the learning and adaptation of potential will be important to support inclusive growth. To workers. The biggest gaps that employers report is support economic growth, job creation and house- not in core technical areas, but in English, leadership, hold welfare, Georgia’s financial sector needs to play and creative thinking. a greater role. This will require: (i) legal reform for Looking forward, a growing digital skills gap products development and robust market practices; risks leaving many workers without employment (ii) effective regulation and supervision of the non- prospects. Skills and knowledge on how to use ICT banking sector; (iii) pension, insurance and capital are becoming increasingly important in day-to-day market reform; (iv) further development of credit and work life. It is estimated that up to 90 percent market infrastructure and risk mitigation products of all jobs will require some knowledge related to (including partial credit guarantees, reinsurance ICT in the near future. One in five firms sees the and special products); (v) financial literacy support; lack of workers with solid digital skills as a major or and (iv) financial stability reforms (introduction of severe problem that constrains their growth. At the sound deposit insurance, crisis preparedness, bank same time, according to BEEPs (2013), a low share resolution framework, financial consumer protec- of Georgian firms provides training opportunities in tion, market competition and minimization of regu- ICT for their employees (11 percent), or allows them latory arbitrage). the time to innovate (14 percent). The situation is exacerbated by the lack of local training capacity to deliver global-standard training at scale, and there Skills and Human Capital is weak interaction between employers and educa- Georgians enjoy wide access to education, but with tors to define demand-oriented programs. The cur- loose links between education and employment. ricula of local universities, especially in science and Enrollment figures suggest that access to education engineering, are outdated. They lag the cutting-edge is not a binding constraint. Even in tertiary educa- technological and ICT innovations, and relevance to tion, Georgia has caught up in recent years: about 35 job market needs. percent of the population aged 25–64 years old have Georgia’s prospects will depend on the abil- completed tertiary education, which compares very ity to continuously upgrade the overall quality of well even with high-income European countries. At human capital. An existing skills gap—between the the same time, as many as 40 percent of Georgia’s outcomes of education and the expectations of the unemployed have a higher education degree. labor market—is an important factor hindering FIGURE 3.19 FIGURE 3.20 Participation in Education PISA Scores Reveal Major Quality Concerns, 2015 Gross enrollment ratio, % of relevant age group, 2015 Science 2009 Georgia 2015 Moldova Reading 2009 2015 Serbia Slovak Republic Mathematics 2009 2015 OECD members 0 20 40 60 80 100 0 20 40 60 80 100 120 Percent Percent Below basic proficiency Basic proficiency Primary Secondary Tertiary High proficiency Source: World Development Indicators Source: OECD 2016. 36 Georgia: From Reformer to Performer employment prospects in Georgia today. Youth and Georgia’s growing dependency on a shrinking non-traditional workers are often outside the imme- labor force makes it imperative that those who diate context for professional education and training enter the labor market are adequately skilled. A and, therefore, at a disadvantage. high-quality education is a key foundation for this, but an area of concern for the country. The most recent results from PISA show that, despite some FIGURE 3.21 PISA Scores: Georgia is Lagging OECD Comparators progress, learning outcomes for secondary-aged children lag behind the OECD and European and China Korea, Rep. Central Asian averages (figures 3.23 and 3.24). Finland Canada Estonia FIGURE 3.22 Japan Georgians Are Lacking Soft Skills Australia Netherlands Numeracy New Zealand Norway Communication Poland Teamwork Denmark Working independently Switzerland Time management Ireland Technical skills Sweden Problem solving Hungary Creative thinking Latvia Leadership United States English Portugal Belgium 0 20 40 60 80 100 United Kingdom Percent Germany Spain Secondary education graduates University graduates France Source: World Bank 2012. Italy Slovenia Greece Slovak Republic FIGURE 3.23 Croatia Test Scores Have Improved on Average... Czech Republic PISA average test scores, 2009 and 2015 Turkey Israel Science Russian Federation Reading Austria Chile Math Costa Rica 350 360 370 380 390 400 410 420 Serbia Average scores United Arab Emirates Mexico 2009 2015 Romania Source: OECD 2009 and 2015. Bulgaria Uruguay Thailand Malaysia FIGURE 3.24 Colombia …But Remain below OECD and European and Central Jordan Asian Averages Montenegro PISA average test scores, 2000–15 Brazil Tunisia 550 Indonesia Albania Average scores 500 Moldova Kazakhstan Georgia 450 Qatar Peru 400 Panama Azerbaijan 350 Kyrgyz Republic 2000 2003 2006 2009 2012 2015 0 25 50 75 100 Score Georgia Europe and C. Asia OECD Source: OECD 2016. Source: OECD 2009 and 2015. Chapter 3: Sustaining Growth and Creating Jobs 37 Georgia will need to prioritize efforts to improve 11. Broadband Commission, United Nations. learning outcomes and skills creation in its educa- 12. Inadequately educated workforce is identified as one of the top five obstacles for innovators in Georgia by the tion system. The system needs to be reformed at all World Bank and the European Bank for Reconstruction levels, with some key priorities, such as: (i) improv- and Development Business Environment and Enterprise ing teacher quality and curriculum; (ii) expanding Performance Survey. the coverage and quality of early childhood educa- tion, particularly in rural areas and among disadvan- taged population segments; and (iii) reforming the References tertiary education system to strengthen the institu- Benmaamar, Mustapha, Oceane Keou, and Daniel tional side through performance-based funding, bet- Mario Saslavsky. 2015. Georgia’s Transport and ter quality assurance, and a shift in focus from inputs Logistics Strategy: Achievements to Date and Areas to results-based accountability mechanisms, together for Improvements. Washington, D.C.: World Bank with curricular changes to ensure better alignment Group. http://documents.worldbank.org/curated/ en/623591468191346382/Georgias-transport-and- with skills demanded in the labor market. logistics-strategy-achievements-to-date-and-areas-for- improvements. Bruhn, Miriam and Jan Loeprick. 2014. “Small Business Notes Tax Policy, Informality, and Tax Evasion — Evidence from Georgia.” Policy Research Working Paper Series 1. Competitive exports are those with revealed com- 7010, World Bank Group, Washington, D.C. parative advantage equal or above 1 (Harmonized System Eiweida, Ahmed, Hyoung Gun Wang, Mariam Dolidze, 4-digit classification). Joseph Salukvadze, Grigol Modebadze, Nancy Lozano 2. Interviews with key garment producers in Tbilisi Gracia, and Cheryl Young. 2013. Georgia - Urbanization revealed that firms heavily rely on imported inputs, includ- Review: Toward an Urban Sector Strategy Georgia’s ing buttons, zippers, and fibers. Having easy access to these Evolving Urban System and Its Challenges. Washington inputs has been crucial in the success of the segment. D.C.: World Bank Group. http://documents. 3. Appendis D provides a more in-depth presentation worldbank.org/curated/en/282241468274759653/ of sectoral performance and prospects. Georgia-Urbanization-review-toward-an-urban- 4. World Bank (2017). sector-strategy-Georgias-evolving-urban-system-and- 5. Benmaamar, Keou, and Saslavsky (2015). its-challenges. 6. The affordability pillar assesses the cost of accessing Kitts, B., I. Santos, A. Isik-Dikmelik, and O. Smith. information and communication technology (ICT) and 2015. “The Impact of Targeted Social Assistance on the level of competition in the ICT sector that affects the Labor Market in Georgia: A Regression Discontinuity cost. Improvements in ICT connectivity and affordability Approach.” Social Protection and Labor Global Practice are reflected in several dimensions of economic activity. Report No. 98707, World Bank Group, Washington, For example, the introduction of e-procurement systems D.C. at the government level increased the likelihood of firms OECD (Organisation for Economic Co-operation and bidding for government contracts. Employment search has Development). 2016. Programme for International also been facilitated by improved ICT penetration: online Student Assessment (PISA) 2015: Results in Focus. Paris: employment search among the employed and the unem- OECD. ployed is above 20 percent in urban Georgia (similar to World Bank. 2015. World Development Report 2015: Digital urban Armenia), while well below 5 percent in Vietnam, Dividends. Washington, DC: World Bank. Bolivia, or Ghana (World Bank 2016). World Bank. 2017. Georgia Road Sector Financing and 7. There were two distinctive reform phases. During Institutional Strategy. Washington, D.C.: World Bank. 2003–07, the public administration went through major deregulation, downsizing, and anti-corruption reforms. This entailed the dissolution of all agencies, the reduction of ministries from 18 to 13, and a downsizing of civil ser- vant staff by 50 percent. In parallel, many burdensome and discretionary regulations were abolished. Other measures included administrative simplification (for example, one- stop shops and e-government solutions), increased pay for civil servants, and customer satisfaction measurements. The second phase started in 2008, when the government was gradually forced to abandon full laissez-faire. 8. Eiweida and others (2013). 9. The two largest banks are traded on the London stock exchange. 10. Kitts and others (2015). CHAPTER 4 PROMOTING SOCIAL AND SPATIAL INTEGRATION Demography does not necessarily have to define Georgia’s destiny, but the new pop- ulation realities will demand important adjustments. Georgia’s population is aging and shrinking due to low fertility and outmigration. This has important implications for spatial planning, but also for productivity and growth. Villages are shrinking, and most cities are stagnating. In the former, most residents live from subsistence farming and transfers, contributing little to the economy. In the latter, the potential for agglomeration benefits and scale economies is depressed. Findings Recommendations • Georgia’s population is aging and shrinking, due to • Equalize access to opportunities, through spatially- low fertility and outmigration. It will not be possi- targeted approaches to reduce the gaps in access to ble to counter this trend in the medium-term unless quality education and health and maximize the crea- Georgia attracts immigrants. tion and deployment of scarce human capital. • Too few Georgians are formal wage workers. Out of • Address constraints to spatial mobility (from rural to a population of 3.7 million, only 700,000 are formally urban areas) and economic spillovers (from urban to employed, one-third of which in the public sector. rural areas) in parallel with sector specific interven- Women and rural Georgians are the least likely to tions to revitalize economic sectors that can support have formal jobs. productive rural employment (for example, tourism and commercial agriculture). • Georgia’s lack of social dynamism is reinforced by spatial inequality. However, while living conditions • Create formal wage jobs and promote transitions are better in urban areas, urban dynamism and job into the labor force, especially for women in unpaid opportunities are insufficient to “pull” people to jobs in rural areas, and unemployed young women move to urban areas. who are also not in education or training. • To close the skills gap, Georgia could consider a well-crafted policy to promote immigration to attract its diaspora and foreign nationals. Progress on Poverty and Shared Prosperity 39 Beso Idoidze is the only living soul guard- ing the historical, highland village of Dartlo through the long and forbid- ding Tushetian winters. Situated 2,000 meters above sea level, the village is often cut-off from the outside world from late September until the end of April. However, it takes more than frost and harsh winds to make Beso abandon his vigil. As long as he has some wood to burn and essential food items such as potatoes, sugar, flour, and olive oil in his larder, he perseveres every winter. Tourism is the only source of income for Dartlo’s residents. Some own guesthouses, others produce traditional handicrafts, and those who have horses offer riding tours. Some are also involved in restora- tion work to maintain the local architec- ture of this unique village. Unfortunately, the tourism season is short: in good years it may stay open for four months, from early June to mid-October. This is the rea- son why many people living in highland villages such as Dartlo prefer to relocate to towns, or to the capital, bringing them closer to jobs. The number of residents in Dartlo and neighboring villages has been shrinking over the years, leaving only elders like Beso holding the fort. 40 Georgia: From Reformer to Performer In order to sustain economic growth, Georgia faces nomic growth between 1996 and 2004 meant that a double inclusion challenge: including youth into many continued to look for opportunities else- the labor force and also rural areas into the produc- where—either permanently or temporarily. The tive economy. Given Georgia’s demographic realities, Russian Federation has been the primary destina- a defining challenge for the future is to ensure that tion, although Georgians also migrated to coun- more Georgians work in formal wage occupations, tries in Western Europe, as well as the United States. including specifically youth and rural populations. Available estimates suggest that more than 10 per- Although it is an emerging middle-income cent of the total population left the country between country, Georgia is still not quite a middle-class 2000 and 2010. society. There is a sizable degree of vulnerability in Current population projections suggest that the population: two in five Georgians have income Georgia’s population will continue to decline (fig- levels and characteristics that place them at real risk ure 4.1). These demographic trends pose a signifi- of falling back into poverty. Part of the reason for this cant challenge to Georgia’s economic future as they vulnerability is an overwhelming reliance on infor- erode the size of the country’s already small working mal, low-productivity activities. age population and constrain the potential to reap Helping Georgians to secure higher and more agglomeration and scale effects. stable incomes will require interventions on the To keep the working age population from demand and supply sides: not only facilitating declining, Georgia will need to attract new workers. private-sector led job growth, but also leveling the Specifically, a net migration equivalent of 2.5 percent opportunities playing field, so that all citizens can of the total population per year will be required to bolster their stock of human capital (through quality keep the working-age population from declining. education and health), and intensively use it in the Without such immigration, the working-age popu- labor market. Improving education quality across lation of Georgia is projected to decline from 67 the board, and eliminating the social, economic, and percent in 2015 to 60 percent by 2050 and the depen- structural/spatial barriers to education and employ- dency ratio—a measure of the economic pressure on ment opportunities are key elements of a strategy to the productive population to support children and enhance the labor productivity and participation of the elderly—will increase by 10 percentage points Georgians in the economy. by 2025. Encouraging immigration at a rate of over 40,000 workers per year for the next 10 years would ease that pressure by keeping the dependency ratio at The Demographic Challenge its 2012 level (figure 4.2). Georgia’s population is declining, and so is the size of the working age population. Georgia’s population FIGURE 4.1 peaked in the early 1990s and has declined sharply Georgia’s Population Will Keep Declining in the Future ever since. In 2015, the population headcount stood Population and components of difference, 2000, 2012, and 2025 at just 3.7 million people, the level it had 50 years ago. 4,500 Moreover, the decline was relatively faster among 4,000 those of working age and children, while the elderly 3,500 Population (thousands) population is growing slightly. 3,000 The driving force behind these trends is declin- 2,500 2,000 ing fertility. At the time of independence, the 1,500 total fertility rate stood at the replacement level of 1,000 2.1 children per woman. Post-transition, fertility 500 declined until 2002, when it reached 1.6 births per 0 woman. There was a modest recovery in subsequent -500 years and the fertility rate has now stabilized at 1.8 -1,000 births per woman. 2000 2012 2025 2012–25 Out-migration has compounded low fertility. In Total population Working-age population (15–64) the early 1990s, many non-Georgians permanently Births Deaths Net immigration left the country, and ethnic Georgians—many of Source: Word Bank staff calculations based on data from the World Development them high-skilled—also emigrated. Sluggish eco- Indicators. Chapter 4: Promoting Social and Spatial Integration 41 Although reversing the profile of migration FIGURE 4.2 flows in a short period of time is not often observed, Keeping the Same Dependency Ratio as in 2012 Will Require More Immigrants Aged 15–64 it is possible. For example, Kazakhstan entered the Population by age group and dependency ratio, 2000, 2012, and 2025 new century experiencing large net emigration, but then shifted to being a net receiver of migrants, as 5,000 60 workers responded to an improving economy and 4,500 declining unemployment. For Georgia, a key chal- 50 4,000 lenge and opportunity will be to convince its youth Population (thousands) to remain in the country and to encourage return 3,500 40 migration, especially of high-skilled Georgians 3,000 Percent abroad (box 4.1). 2,500 30 2,000 Maximizing Labor Force Participation 20 1,500 Too few Georgians have formal jobs. Less than a 20 1,000 10 percent of Georgians—only 700,000 people—are 500 wage workers. This is only one-third of the working 0 0 age population and explains why the country has not 2000 2012 2025 2025 yet fully transformed into a modern economy, espe- (with immigrants) cially as more than one-third of these wage workers Youth (0–14) Working-age (15–64) Older (65+) are employed in the public sector. Conversely, a large Immigrant (15–64) Dependency ratio (%) share of the population is either out of the labor force Source: World Bank staff calculations based on World Development Indicators. BOX 4.1 Successful Examples of Attracting Skilled Migrants 1. Chile: “Start-up Chile” country. The business must satisfy the ‘innovativeness’ require- The Chilean government launched a pilot program in 2010. The ment which was introduced in September 2013. In selected cases aim of “Start-Up Chile” is to attract early-stage, high-potential for particularly promising businesses, the government will match entrepreneurs worldwide. The ultimate objective of this scheme investment from the private sector. The visa is granted for one is to position Chile as the innovation and entrepreneurship hub of year and renewal criteria are based on progressive targets for Latin America. The program runs like a competition for funding, local job creation, revenues, and spending. The EntrePass allows with three competitions each year. Each competition results in the the applicant to bring family members (spouse and unmarried selection of 100 start-ups with on average two founders per start- children under 21) to Singapore by applying for their Dependant’s up. The scheme selects promising young firms and gives their Passes. EntrePass holders are also eligible to apply for Singapore founders capital, space networking mentoring, and a year’s visa permanent residence. There is no official quota of the number of to come and work on their ideas in Chile. Chile also has one of the EntrePass to be granted. In 2012, there were 1,300 EntrePass visa fastest incorporation rates in the world, allowing a new start-up applications and 1,000 applications in 2013, 50 percent of which to incorporate almost in one day. Since its introduction, around were accepted. 500 companies and almost 900 entrepreneurs from a total of 37 countries have benefited from it. Start-Up Chile has attracted a lot 3. Portugal: Golden Visa of global high-tech companies. In addition, the influx of start-ups The Portugal Golden Visa program has proven to be the most is boosting local interest in entrepreneurship. The introduction of popular scheme in Europe with investors attracted to its flex- the Start-Up Chile has also changed Chileans’ attitudes and pro- ibility and benefits. Launched in 2012, the investor visa program vided them with a global network of business contacts. has been actively promoted internationally by the. An investment of €500,000 in real estate in Portugal will gain a residency per- 2. Singapore: Entrepass mit for a family including dependent children. This program has Singapore Entrepass was created in 2004. It went through sev- proven to be hugely popular and has contributed to economic eral updates to better target innovative entrepreneurs. The growth in Portugal since the scheme was launched. House prices scheme is part of Singapore’s general plan to become a regional have risen significantly, and many investors are already noticing business hub and attract the best entrepreneurial minds to the the potential in future capital gains. 42 Georgia: From Reformer to Performer (26 percent), unemployed (10 percent), or underem- labor force participation stands at around 70 percent, ployed (35 percent), often in low-productivity agri- the estimated income loss is consequently lower. The culture (figure 4.3). gender gap in labor force participation has remain One way of increasing overall labor force partic- largely unchanged since 2008 at almost 20 percent- ipation is by bringing in more women. Female labor age points, just under the average for the region or participation—at about 58 percent—is about aver- that of upper middle-income countries, but three age for the region and slightly above that of Eastern times larger than in Slovenia, Latvia, or Lithuania. European countries. But it could be increased and Compared with these countries, Georgia provides better allocated. Women’s lagging participation in lower levels of support to household with responsi- employment and entrepreneurship can be readily bilities such as childcare and eldercare, which plays recognized as a misallocation of Georgia’s human an important role in reducing female labor force par- resource potential, with gaps resulting in an esti- ticipation. The negative association between women’s mated loss of economic output equivalent to 11 per- labor force participation and childcare responsibili- cent of gross domestic product (GDP). In countries ties is large enough to cancel-out the positive impact such as Iceland and the United States, where female of more education on women’s labor activity. FIGURE 4.3 Many Georgians Are Unemployed or Working in Low-Productivity Activities Georgia’s total population: 3,655,391 Children Working-age population Elderly (0–14 years old) (15–64 years old) (65+ years old) 0.7 million 2.4 million 0.6 million 26% Not in the labor force 74% In the labor force 64% Employed 10% Unemployed 11% 1.8% 13.3% Youth Disabled Other (15–24 years old) 34% Self-employed 30% Wage workers 15.2% 12% 7% 19% 10.6% Unpaid Agriculture Nonagriculture Private Public Source: World Bank staff calculations based on IHS 2015, 2016, and 2017 data (Geostat). Chapter 4: Promoting Social and Spatial Integration 43 FIGURE 4.4 nature. Indeed, close to three-quarters of households Georgia’s Gender Gap in Labor Force Participation engaged in agricultural production report produc- Remains Substantial ing mainly for their own consumption. Economic Georgia and selected countries, 2017 activities outside the agriculture sector in rural Turkey areas are very limited, which implies that a large Paraguay Chile segment of the economically active population is Georgia highly unproductive. Peru Rural employment is mostly informal. About 43 Romania percent of those employed nationwide work in wage Czech Republic Poland Russian Federation FIGURE 4.5 Estonia Labor Force Participation Slovenia By age group, Georgia and selected countries, 2017 Latvia Lithuania Romania Czech Republic Europe and C. Asia Lithuania Upper middle-income Georgia 0 10 20 30 40 50 Slovenia Percent Poland Chile Source: Calculations based on World Bank 2017 (figure 3.6). Turkey Russian Federation Estonia Activating the youth is equally important. Labor Latvia force participation among Georgia’s youth is low, but Paraguay comparable to that of other advanced reformers, such Peru as Lithuania, or Slovenia. But unlike these countries, Europe and C. Asia where the proportion of youth not in employment, Upper middle-income education, or training (NEET) is less than 10 per- 0 20 40 60 80 cent—which means that many unemployed youth Percent are actually enrolled in education or training—the 15–24 years old 15–64 years old equivalent share in Georgia is 30 percent, with higher Source: Calculations using data from the World Development Indicators and levels for young women. Low rates of overall labor International Labour Organization estimate. force participation and a relatively high proportion of NEETs suggest that Georgia’s youth may be dis- FIGURE 4.6 proportionately at risk of labor market exclusion. Youth Not in Employment, Education, or Training Since the NEETs are neither investing in skills nor Georgia and Selected Countries, 2017 gaining experience through employment, they have Georgia limited chances of finding (productive) employment Turkey in the future. Paraguay Romania Peru Stalled Structural and Spatial Chile Russian Federation Transformation Estonia Poland A sizable share of the population remains engaged Latvia in very low-productivity activities in the rural Lithuania economy. Over the past decade, employment in agri- Czech Republic culture has declined by less than 1 percentage point Slovenia annually and still stands at 49 percent nationwide Europe and C. Asia (71 percent in rural areas), while it contributes only 0 5 10 15 20 25 30 35 40 just over 8 percent of total value-added in the econ- Percent omy. Although there is some commercial activity, Male Female including in high-end niche products such as wine, Source: Calculations using data from the World Development Indicators and ETF most agricultural activities remain of a subsistence 2015 based on World Bank 2017 (figure 3.6). 44 Georgia: From Reformer to Performer jobs mostly in Tbilisi and other urban areas. Among suggests that there is a substantial amount of internal the remaining 57 percent, 42 percent are engaged in migration, at least across regions, given that about agriculture, either as own-account workers (24 per- 28.5 percent of the population report living in a cent) or unpaid workers (23 percent). The bulk of location different from their places of birth. Tbilisi unpaid work (95 percent) is in rural areas and car- is the largest net receiver of population, but there is ried out by women (69 percent), and when paid, also a sizable outflow from Tbilisi to other parts of almost the totality of workers in the sector work as the country. Getting a better understanding of who own-account workers. The remaining 15 percent of moves, for what reasons, and for what duration, nonwage workers are self-employed outside of the and of how these moves square with observed pat- agriculture sector. terns of regional and city growth, is as an important Given the high urban/rural and formal/infor- knowledge agenda that should be addressed beyond mal productivity differentials, limited spatial and this Systematic Country Diagnostic. However, what structural transformation and low urbanization emerges clearly is that weaknesses in the land market are constraining growth. As in many other coun- make this crucial asset hard to collateralize and turn tries, growth centers in Georgia are highly polarized, into capital. In certain rural areas, with aging and with most economic activity concentrated in Tbilisi shrinking populations, depressed land prices, act as and Batumi. The capital hosts about one-third of a disincentive for migration to more expensive urban the national population and accounts for half of the areas. Limited educational attainment (only 15 per- country’s GDP. Its per capita output is nearly twice cent of rural population have higher education), the national average, and more than three times that and still insufficient employment creation in urban of the most lagging regions. Living standards are centers also act as deterrents. Despite a continuous much higher in urban areas and access to opportuni- reduction in urban unemployment since 2008, it was ties are better. The fact that Tbilisi and Adjara are the still above 20 percent in 2016. only two regions that have seen positive urban popu- Georgia will need to rethink its spatial develop- lation growth between 2002 and 2014 demonstrates ment policy, to better deploy its limited resources. that these poles have succeeded in attracting peo- The provision of basic services and infrastructure, ple, but the strength of the pull remains weak. The together with efforts to enable people to move to the urban population in Tbilisi and Adjara increased by cities, will help the country to achieve more inclusive a cumulative 2.5 percent and 11 percent, respectively, growth. It will also positively impact environmental between these two census rounds (table 4.1). concerns on air pollution. However, Georgia could The slow growth of urban areas reflects a com- soon witness “dying villages” (the share of house- bination of limited opportunities and structural holds with only elderly members is over 15 percent in constraints to internal mobility. Available evidence rural areas). With limited resources, the government FIGURE 4.7 FIGURE 4.8 Employment Distribution Type of Work By Main Sectors, 2006, 2010, and 2015 By Place of Residence, 2015 100 100 80 80 60 Percent 60 Percent 40 40 20 20 0 0 Rural Rest of Tbilisi All 2006 2010 2015 urban Agriculture Services Wage workers Unpaid Self-employed in agriculture Manufacturing Construction Entrepreneur Self-employed, not in agriculture Source: World Bank staff calculations based on data from the IHS (Geostat). Source: World Bank staff calculations based on data from the IHS (Geostat). Chapter 4: Promoting Social and Spatial Integration 45 TABLE 4.1 Overall Population and Urban Population By Region, 2002 and 2014 2014 2002 Overall Urban Total Urban Total Urban population population Georgia 3,713,804 2,122,623 4,369,579 2,285,290 Down Down Tbilisi 1,108,717 1,078,297 1,081,679 1,052,001 Up Up Adjara 333,953 184,774 376,016 166,575 Down Up Guria 113,350 31,904 143,357 37,560 Down Down Imereti 533,906 258,510 699,666 323,945 Down Down Kakheti 318,583 71,526 407,182 84,694 Down Down Mtaketa-Mtianeti 94,573 21,259 125,443 32,113 Down Down Racha-Lechkhumi and Kvemo Svaneti 32,089 6,970 50,969 9,582 Down Down Samegrelo-Zemo Svaneti 330,761 129,391 466,100 183,177 Down Down Samatkhe-Javakheti 160,504 54,663 207,598 65,601 Down Down Kvemo Kartli 423,986 180,118 497,530 186,574 Down Down Shida Kartli 263,382 105,211 314,039 113,682 Down Down Source: Population Census 2002 and 2014. Note: The population of Abkhazia has been excluded from the 2002 total to make it comparable to 2014. faces a choice between providing services to these 3. According to a recent census-based report, while small and shrinking remote establishments on the the percentage of males who are neither in employment or education drops to 31 percent at age 29, the percentage one hand, and supporting the requirements of of females continues to rise to 54 percent (Eelens 2017). A increasing urbanization on the other. possible explanation of the high number of female youth Further removing constraints to spatial mobil- not in employment, education, or training is the long- ity, including by improving connectivity, would standing and still prevalent tradition of early marriage and help to unlock under-leveraged growth engines early childbearing among some groups in Georgia. in agriculture and tourism, and also address ter- 4. World Bank (2017). 5. World Bank (2017). ritorial inequalities. Recent evidence suggests that 6. From first-hand consultations, as well as available urban growth, in Tbilisi and other cities, does not research. easily spill over into rural areas, consistent with the 7. Sinha and others (2016). close to 20 percent of rural households that depend entirely on self-production of food and social assis- References tance. Geographically uneven development and the persistence of territorial inequalities are not particu- Cuberes, D. and M. Teignier. 2016. “How Important Are larly unique to Georgia, although its unique topogra- Labor Market Gender Gaps in the South Caucasus?” phy that includes remote and mountainous regions, Paper prepared for the “FY16 South Caucasus Gender along with fertile valleys and seashores, gives it a par- Assessment Program.” Eelens, Frank. 2017. Young People in Georgia: An Overview ticular character. However, the lack of economic con- Based on the 2014 General Population Census Data. nectivity between urban and rural areas undermines Tbilisi, Georgia: National Statistics Office of Georgia sustainable improvement in living standards in rural (Geostat) and United Nations Population Fund areas, either in agriculture through links with agri- (UNFPA). . cultural value chains, or in nonagricultural activities, Sinha, Nistha, Paul Andres Rodas Corral, Rodrigo Salcedo such as tourism. DuBois, and Cesar Cancho. 2016. “Impact of Structure of Growth and Income on Rural Poverty in Georgia.” Paper prepared for the South Caucasus Programmatic Notes Poverty Assessment Technical Assistance FY15–16, World Bank, Washington, D.C. 1. Cuberes and Teignier (2016). World Bank. 2017. Georgia Jobs Diagnostic. Washington, 2. World Bank Country Gender Assessment. D.C.: World Bank. CHAPTER 5 MANAGING RISKS FOR SUSTAINABLE GROWTH Georgia’s ability to extend progress into the future hinges on the way it preserves two of its great assets: a tradition of prudent macroeconomic management and its unique environment; both of which are under strain. In recent years, Georgia has relaxed its traditionally prudent fiscal stance: increases in expenditure and spending commitments have widened the structural deficit and weakened debt sustainability. Consequently, maintaining fiscal sustainability, while supporting growth and social safety nets, will be- come increasingly important. The environment is also under stress, and the potential for Georgia to leverage the wealth of its natural resources could come into conflict with the need to preserve it. Findings Recommendations • The introduction of universal health care (UHC), tax • Georgia needs to increase the efficiency and effec- reform, and planned increases in capital spending tiveness of public investment, including through bet- have heightened concerns over fiscal sustainability. ter public procurement practices. • Georgia has the world’s highest mortality rate due • Off-budget operations and contingent liabilities are to air pollution. a significant source of fiscal risk, which needs proac- tive management. • Protecting the environment is critical to further de- velop the tourism sector, one of Georgia’s fastest growing services exports. Progress on Poverty and Shared Prosperity 47 Maia Kiknadze established “Caucasus Travel,” Georgia’s very first tour operator in 1991. This was at a time when the country had no tourist infrastructure whatsoever, and no compliance with international standards. There was almost no international awareness of the country—Georgia was identified either as a province of the former Soviet Union or one of the states in the United States. Several years later, Caucasus Travel has grown and spawned additional companies that have been united under the banner of one holding company, the Georgian Hospitality Group, which in total has 60 full-time employees. Maia says she believes that the company has played a significant role in raising awareness about Georgia and creating its tourism industry. Overall, the major tourist product that Georgia has to offer to the world is cultural tourism, which is then combined with wine and gourmet tourism, adventure, eco and so-called “nature-based” tourism. It is around these major products that tourism-market offers are generally oriented. 48 Georgia: From Reformer to Performer Fiscal Space Is Increasingly Constrained government reoriented its spending priorities to address social needs, and this has resulted in an Georgia had previously maintained a countercycli- increase in social spending from 7 percent of GDP in cal fiscal policy stance, which allowed public debt 2012 to 9.3 percent in 2017. The increases were pri- to remain within sustainable margins. During the marily in the public sector wage bill, the level of pen- high growth rate period of 2004–07, the tax regime sions, health (following the introduction of UHC), was streamlined with reductions in the number of electricity subsidies, and incentives provided under taxes and key tax rates. Increases in tax revenues— the High Mountainous Regions Law. This reorienta- from 14.6 percent of gross domestic product (GDP) tion has made the budget more rigid and shifted the in 2003 to 25.8 percent in 2007—stemmed mostly balance of spending toward recurrent expenditures. from parallel initiatives to strengthen tax adminis- Overruns in health spending have highlighted tration. While spending increased even faster, raising a specific challenge the government faces in main- the fiscal deficit, privatization receipts allowed public taining the sustainability of the UHC program. debt to fall from 55 percent to 22 percent of GDP Since the implementation of UHC, health spending during the period. Following the twin shocks in 2008 has risen sharply (from 4.0 percent to 8.4 percent and the subsequent sharp economic contraction, the of total government spending between 2012 and authorities responded with a fiscal stimulus program 2017), and UHC spending has overshot its budgeted that increased the deficit and raised debt levels, but amount in 2015 and 2016 before stabilizing in 2017 supported the recovery. As the economy rebounded, While public health spending remains low—at 2.3 expenditure-driven fiscal consolidation followed percent of GDP—and out-of-pocket expenditures during 2010–11. place a significant burden on households, the macro- Fiscal discipline was relaxed following the fiscal outlook can hardly accommodate further change in government in 2012. Spending increased increases in health spending in the short to medium- significantly as the new administration prioritized term in the absence of compensating adjustments to social policies and sought to respond to the external overall system efficiency. shock of late 2014. As a result, the fiscal deficit has Planned increases in capital spending may add widened since 2015: it reached 3.9 and 3.8 percent of further pressure on fiscal balances in the medium- GDP in 2016 and 2017 respectively, while the public term. Public capital expenditures have declined in debt-to-GDP ratio rose to 44 percent as of end-2017 recent years, from 8–9 percent of GDP during 2007– compared to 33 percent of GDP in 2012. (figure 5.1). 12 to 6.3 percent of GDP in 2013–16. Most of the Increases in social spending and new enti- capital expenditures are in the areas of roads, munic- tlements widened the structural deficit. The ipal infrastructure, tourism-related infrastructure, FIGURE 5.1 Fiscal Imbalances Have Widened and Their Sustainability Worsened a. Fiscal balance, 1995–2016 b. General government gross debt, 2000–16 25 400 20 15 350 10 300 5 0 250 Percent Percent -5 200 -10 -15 150 -20 -25 100 -30 50 -35 -40 0 1996 98 2000 02 04 06 08 10 12 14 16 2000 02 04 06 08 10 12 14 16 Share of GDP Share of average tax revenues Share of GDP Share of average tax revenues Source: Kose and others 2017. Chapter 5: Managing Risks for Sustainable Growth 49 housing for IDPs, and hydropower rehabilitation and the revenue performance has been continuously transmission. Going forward, however, the govern- robust and the revenue shortage risks associated with ment plans to significantly ramp up capital spend- the elimination of profit taxes on reinvested profits ing over the medium-term. In 2017, the share of (Estonian model), has been minimized by a sharp the investment budget in the total fiscal envelope increase in excise tax rates on fuel and tobacco, espe- increased to almost 20 percent by 2.1 percentage cially from 2017. points. The recent developments in 2017 were positive Changes in the corporate tax regime and contin- overall. Growth was estimated to have recovered sig- gent liabilities have added to fiscal concerns. Early nificantly, driven by strong credit growth and a sharp in 2017, the government introduced the Estonian recovery in remittances. Exports also recovered by tax model, replacing the corporate income tax with over 20 percent year-on-year, net exports contrib- a dividend tax: from 2017 onward, only distributed uted positively to growth along with favorable tour- profits are taxed at the existing rate of 15 percent. ism and remittances dynamics. The fiscal accounts This measure is expected to boost growth in the were consistent with the announced consolidation medium-term, but proceeds from this type of tax policy, which envisaged a flat current spending enve- declined in 2017. To compensate for the revenue lope and a spike in capital investments. Tax collec- loss, excises on fuel, tobacco and cars were increased. tions increased, mostly from excise and VAT on the Other instruments are difficult to adjust, as the back of stronger than expected economic activity. Liberty Act—which supports the stability of the tax As a result, the overall fiscal balance in 2017 was system—requires a referendum to introduce new maintained below 4 percent. The outlook for 2018 taxes or increase rates, with the exception of excise is also favorable: the 2018 budget law sustains fiscal and property taxes. Hence, further fiscal adjust- consolidation while providing more space for capital ment will need to come from lower expenditures. spending. Contingent liabilities are also a concern. The govern- Nonetheless, going forward, maintaining fiscal ment has signed power purchase agreements with sustainability while supporting growth will require several hydropower companies, which could have continued disciplined focus. large fiscal implications going forward. In addition, the SOE sector is a potential source of major contin- • The Liberty Act restrains the government from gent liabilities. Some estimates put these contingent introducing new taxes or increasing tax rates, with liabilities at about 40 percent of GDP. a few exceptions, putting the burden of adjust- In order to return to a more sustainable path, ment squarely on the expenditure side. the government developed a fiscal consolidation • To address significant infrastructure needs and program at the end of 2016. The program was boost competitiveness, spending increases will reflected in the annual State Budgets for 2017 and also require greater emphasis on investment qual- 2018 and the government’s medium-term frame- ity. Since 2010, digital government procurement work, which envisages the deficit being reduced (e-GP) has fully replaced the former paper-based gradually to 2.4 percent of GDP by 2022. This rests procurement system, making the public pro- on the successful implementation of a set of ambi- curement process simpler and more transparent, tious targets to: (i) reap efficiency gains in current with enhanced competition and reduced scope spending; (ii) restrict the management of the wage for corruption. In 2016, a new public investment bill at central and local level of the government; and management framework was adopted. The gov- (iii) additional spending controls on local govern- ernment is also finalizing a legal and regulatory ments for the purchase of goods and services. (iv) in framework to guide PPPs in infrastructure proj- public health care the aim is to place more emphasis ects. All these efforts will help to improve the effi- on the most vulnerable and generally improve the ciency and effectiveness of public investment, but management of claims.; (v) improve management further advances will be needed. of public investment projects through introduction • Planned increases in capital spending, which can and implementation of PIM guidelines at the central help boost long-term growth, will require the and local budget level; (vi) reduce fiscal and quasi- government to curtail current spending to remain fiscal risks through monitoring of contingent liabili- on track toward fiscal consolidation and lower ties and enactment of the new PPP law. Meanwhile external vulnerabilities. 50 Georgia: From Reformer to Performer • Pressures have increased with new social assis- external debt include financial institutions [Bank of tance entitlements. Ensuring that these do not Georgia and Tbilisi Business Centre Bank] and non- create disincentives for work and factoring in financial corporations, such as the Georgian Oil and the impact of aging on pension liabilities will be Gas Corporation (eurobond of US$200 million), the challenging. Georgian Railways (eurobond of US$670 million), and the Marabda-Kartsakhi Railway (US$560 mil- Moreover, contingent liabilities are cause for lion highly concessional loan from Azerbaijan). Total concern. Contingent liabilities arising from quasi- external debt is projected to increase gradually to 87 fiscal activities of SOEs and power purchase agree- percent of GDP by 2022 (figure 5.4). However, pro- ments with hydropower companies are imperfectly jections remain highly sensitive to changes in macro- known and factored in a comprehensive analysis economic assumptions. According to the latest debt of fiscal risks. Going forward, these will need to be sustainability analysis, lower growth, and real interest monitored and managed steadfastly to avoid the rate shocks would push external debt to 95 percent development of additional liabilities on the bud- and 89 percent of GDP, respectively, and a combined get, including through establishing a comprehen- shock to 98 percent of GDP by 2022. A 30 percent sive financial database for SOEs (which, according exchange rate depreciation shock would push the to some estimates contributed to 7 percent of GDP debt close to 131 percent of GDP by 2022. in 2012) and developing an analysis of fiscal risks through expanded coverage of SOEs and PPPs. Environmental Concerns Need to Be External debt is a source of vulnerability. The high reliance on foreign savings to fuel growth and the Factored In recent depreciation of the lari resulted in an increase Efforts toward green growth have received a boost in external debt to 112 percent of GDP by September from the Association Agreement (AA) with the 2017 (figure 5.2). About 75 percent of external debt European Union and the Paris Climate Agreement is long-term and the private sector holds nearly two- of 2015. Georgia is expected to meet its environmen- thirds of external debt (figure 5.3). Inter-company tal obligations under the AA during 2017–30. Also, external loans amount to nearly 20 percent of GDP, under the Paris Climate Agreement, Georgia has and generally carry lower repayment risks. In addi- agreed to an unconditional contribution to reduce tion, 5 percent of the external debt is denominated in its greenhouse gas emissions by 15 percent below local currency. The main holders of Georgia’s private the ‘business-as-usual’ scenario by 2030. Under the FIGURE 5.2 FIGURE 5.3 Maturity of External Debt, 2006–17 Composition of External Debt, 2006–17 100 160 100 140 80 80 120 Percent of GDP 60 100 60 Percent Percent 80 40 60 40 40 20 20 20 0 0 0 2006 07 08 09 10 11 12 13 14 15 16 17e 2006 07 08 09 10 11 12 13 14 15 16 17e Long-term debt (%) Short-term debt (%) Intercompany loans Corporate Gross international reserves (% of GDP) National Bank of Georgia and banks Public, including SOEs Source: National Bank of Georgia. Source: National Bank of Georgia. Note: E = estimate. Note: E = estimate; SOE = state-owned enterprise. Chapter 5: Managing Risks for Sustainable Growth 51 FIGURE 5.4 Sustainability of Total External Debt a. Debt under baseline scenario and stress tests, 2017–22 b. Projected to increase to 87 percent of GDP, 2012–22 55 100 Projection 90 50 Percent Percent 80 45 70 40 60 2017 2018 2019 2020 2021 2022 2012 2014 2016 2018 2020 2022 Real GDP growth shock Real interest rate shock 30% baseline Combined Real exchange rate shock Baseline Primary balance shock Source: World Bank-International Monetary Fund Debt Sustainability Analysis. Sustainable Development Goals, the government in gasoline, are partly responsible for this high level has prioritized environmental sustainability actions, of deaths. Hard-fuel burning generates significant such as the sustainable management of forests, and indoor pollution, which is localized and seasonal, but the integration of climate change mitigation and may be a significant health hazard to those exposed. adaptation measures into national policies. Air pol- Georgia’s ecosystem has been facing multiple lution, inadequate waste management, and forest challenges, including illegal logging, pests and degradation due to illegal logging are the main envi- diseases, cattle grazing, forest fires, and generally ronmental concerns, the latter leading to a higher unsustainable management practices. Forest is the frequency of natural disasters such as floods. Efforts predominant ecosystem in Georgia, covering up to toward addressing these concerns are already evi- 40 percent of the country, and also the ecosystem dent. The Waste Management Code was adopted in that supports the richest biodiversity, with unique 2015 and the Law on Living Modified Organisms was endemic tree species and some of the oldest pris- adopted in 2014. In addition, the new Forest Code, tine forests in the European region. Forests cover the Environmental Assessment Code, the Law on diverse landscapes and perform diverse functions, Water Resources Management, the Law on Biological including: biodiversity conservation; water balance Diversity, the Law on Environmental Liability, the maintenance; retention of soil fertility; prevention of Law on Major Accident Prevention, the Law on Soil erosion, flashfloods, landslides and avalanches; car- Protection, and amendments to the Law on Ambient bon sinking and storage; and ecosystem, cultural and Air Protection are in the pipeline and at various health services. However, high demand for firewood stages of completion. from rural communities is leading to deforestation Georgia has the world’s highest mortality rate and forest degradation. due to outdoor and indoor air pollution. Based on This poses a serious risk to the booming tourism 2012 data, Georgia tops the country list with nearly sector. Tourism is one of the fastest growing services 300 deaths per 100,000 people annually. In Tbilisi, exports from Georgia and an increasingly important air pollution is higher in the winter than in the economic sector. Protecting the delicate ecosystem in summer, suggesting that, together with automobile Georgia will be critical in supporting further devel- emissions and construction work, urban heating is opment of the tourism sector. Encouraging sustain- also a major contributor. Limited spatial and urban able practices in tourism development will also be planning, inadequate norms on energy use in new important. construction, aged energy inefficient infrastructure Legacy pollution from hazardous mining built in pre-independence years, the absence of tech- waste is a major issue. This is particularly relevant nical inspections of vehicles, and high sulfur levels in Ambrolauri municipality, where about 100,000 52 Georgia: From Reformer to Performer tons of arsenic waste have been identified. In 2013, is not sustainable for the country. The energy sec- flooding of the Tskhenistskali River caused the tor strategy needs to embrace diversification of the release of the arsenic waste, creating an emergency. energy generation mix to include other renewable Manganese mines abandoned without proper con- energy sources. servation threaten human and environmental health Hydropower development could itself have neg- in Chiatura municipality. Unspecified amounts of ative impacts on the environment. Excessive depen- obsolete pesticides scattered in agricultural areas, as dence on hydropower is associated with possible well as some 2,800 tons of those temporarily stored hydrological risks and population displacement, and at Ialguja site without proper packing, represent risks for cultural heritage sites. The transformation other sources of soil and water pollution from haz- of landscapes through hydropower development ardous substances. projects could affect the delivery of important eco- Georgia is exposed to a wide variety of natu- logical services and undermine nature-based tour- ral hazards, notably floods, debris and mudflows. ism prospects. In short, there is a need for a more These have contributed to most of the natural disas- systematic assessment of environmental and social ter-related fatalities and economic losses. The 2000 impacts. There is no coordinated management of drought in the regions of Kakheti and Kvemo-Kartli water resources in Georgia. Water is used by the affected 696,000 people and caused economic losses hydropower sector, agriculture, tourism, and trans- of US$200 million. The 2012 storms that damaged port. There is no clarity on how to prioritize usage, agricultural land, homes, and municipal infrastruc- allocate water, and resolve disputes. It is unclear how ture in eastern and southern parts of the country much water hydropower plants will be allowed to use caused losses of US$123 million. Large landslides and in the future. With no single requirement for water- related flooding of the Tergi River in 2014 destroyed use permits, there is a legal and contractual gap in infrastructure and interrupted international road the case of a conflict over the usage of water. Finally, transportation between Georgia and the Russian there is no fee for water usage, which is an unusual Federation. More recently, the 2015 flood event in practice worldwide. Tbilisi caused estimated economic damage of US$50 million. The occurrence of natural disasters appears Notes to be on an increasing trend due to local deforesta- tion and the global climate change. 1. OECD/IEA (2016). Risks posed by climate change could adversely 2. UNECE (2016). impact various sectors of the economy, including 3. UNECE (2016). agriculture and hydropower generation. While the impact of climate change on the overall intensity and References frequency of hydrological hazards cannot be pre- dicted with certainty, data suggest that extreme wet Kose, M. Ayhan, Sergio Kurlat, Franziska Ohnsorge, and and dry episodes have increased in recent years in Naotaka Sugawara. 2017. “A Cross-Country Database both frequency and amplitude. This is likely to affect of Fiscal Space.” Policy Research Working Paper 8157, World Bank, Washington, DC. river runoff and lead to the more frequent occur- MOA (Georgian Ministry of Agriculture). 2014. Strategy rence of floods and landslides. The risks to the agri- for Agricultural Development in Georgia, 2015–2020. cultural sector are immediate and important because Tbilisi: MOA. the rural poor depend disproportionately on agricul- OECD (Organisation for Economic Co-operation and ture for their livelihoods and have limited adaptation Development) 2016. PISA 2015 Results: Excellence and Equity in Education. Paris: OECD. capacity. Georgia has the third-largest hydropower OECD/IEA (Organisation for Economic Co-operation potential in Europe with only about one-fifth of the and Development/International Energy Agency). 2016. economically feasible potential developed. The coun- Energy and Air Pollution World Energy Outlook, Special try has a hydropower-dominated power system with Report. Paris: OECD/IEA. the hydropower station, Enguri, generating 70 per- UNECE (United Nations Economic Commission for cent of the total demand, while small and medium Europe). 2016. Environmental Performance Reviews, Georgia, Third Review. Geneva: UNECE. hydropower plants and gas-fired thermal power WEF (World Economic Forum). 2016. The Global plants produce the rest. Adverse climatic changes Competitiveness Report 2016–2017, edited by Klaus thus threaten the energy security of Georgia. In this Schwab. Geneva: WEF. context, heavy reliance on hydropower generation CHAPTER 6 PRIORITIZATION Based on the evidence and analysis presented in Georgia will only be able to maintain high this report, this chapter summarizes the main growth if it boosts connectivity and upgrades the constraints that Georgia faces in amplifying prog- skills of the workforce. Key conditions for progress ress toward the twin goals. The principal conclu- to be sustained over time includes addressing threats sion is that further progress will hinge critically on to fiscal stability and preserving the environmen- Georgia’s ability to maintain high rates of economic tal through active natural resources management. expansion, through recalibrating its growth model Greater focus will be also be required—although to allow the country to continue to move up along this remains an area of relative knowledge gaps— the development value chain. Extending the growth on ensuring that the pro-poor potential of growth performance of the past decade will require a deter- is maximized, by addressing the underlying causes mined focus on enhancing the competitiveness and of economic dualism, which currently inhibits an export-orientation of the economy, and productivity optimal use and deployment of the country’s human in key sectors of the economy. capital (figure 6.1). FIGURE 6.1 Priorities for Inclusive Growth BOOSTING GROWTH External connectivity Skills SECTORAL OPPORTUNITIES LEVERAGING GROWTH IMPACT Agribusiness Internal connectivity Hydropower Access to opportunities Textiles and apparel ENSURING SUSTAINABILITY Fiscal management Tourism Environmental protection Natural resources management Source: Georgia SCD team. Chapter 6: Prioritization 55 These priorities were identified by applying three Combining the insights from the filtering process, sets of filters, namely twin goals relevance filters, key priorities can be identified along the hierarchy of stakeholder consultations for economy-wide con- top and high priorities. straints, and sector-level micro-assessments for the sectoral focus areas. • Top priorities, including those actions that can unlock productivity improvements and thus • Twin goals filters: These included benchmarking help Georgia to maintain high rates of economic actions and priorities against expected impacts growth going forward. on growth, inclusion, and sustainability. A styl- • High priorities, include those policies that: ized representation of this exercise is shown in (i) would alleviate economic dualism so that table 6.1. Georgia’s human capital can be better developed • Stakeholder consultations: A first round of con- and deployed; and (ii) are required to ensure that sultations took place in December 2016, which the growth and inclusion model remains sustain- helped to identify the broad range of areas to be able over the medium to longer run. covered in this Systematic Country Diagnostic. During a second set of consultations in May 2017, Priority #1: Integration into global value chains. the team tested and calibrated the main hypoth- eses, through meetings with representatives from Rationale: The domestic market is too small to sup- the public sector, as well as firms, academia, and port high rates of growth, while Georgian firms civic society. also lack access to managerial and technical skills • Micro-assessments: To identify the most promis- and the necessary know-how to boost productivity. ing sectors (zooming in on those sectors with the Integration in global value chains (GVCs) would greatest potential and strong comparative advan- help to address both constraints. The surest way to tage), the team deployed sector scans, which the overcome information bottlenecks and discovery International Finance Corporation developed for costs for Georgian firms seeking to access exter- the new Country Private Sector Diagnostics (see nal markets is through GVC integration. Moreover, appendix D for results and details). the FDI that comes with such integration can help TABLE 6.1 Twin Goals Filters Scores Relevance to Relevance to Relevance to List of constraints growth inclusion sustainability Solid foundations • Macro and fiscal risks P P P • Low efficiency of institutions P Productive individuals • Low educational achievement P P P • Lack of skills P P • Economic dualism and lack of convergence P P P Dynamic and competitive firms • Limited participation in global and regional value chains P P • External and internal connectivity P P P Public assets and resources • Increasing energy security P P • Safeguarding environmental sustainability P P Source: Georgia SCD team. 56 Georgia: From Reformer to Performer address managerial deficiencies that currently limit well-crafted programs to promote immigration productivity growth in domestic production. to Georgia (whether of foreign nationals or of the Strategies: Combine a smart direct investment pro- Georgian diaspora). motion strategy into high potential sectors with export intelligence interventions to reduce firms’ Priority #4: Equalizing access to opportunities and discovery costs. Both anecdotal and systematic quan- investing in people. titative analyses in Georgia indicate high discov- ery costs to introduce new products and reach new Rationale: Today the country is fractured between markets. Export and investment promotion could be islands of prosperity and opportunity (mostly in a powerful tools to support firms’ internationalization few cities) and a vast rural hinterland characterized through GVCs. by limited mobility and very low productivity. Strategies : Equalizing access to opportunities Priority #2: Tackling hard and soft connectivity through spatially targeted approaches to reduce gaps constraints. in access to quality education and health would go a long way toward ensuring that those in urban and Rationale: With a strategic location that has been rural areas have the same potential to contribute eco- made even more attractive by recent trade agree- nomically. These policies would need to be comple- ments, Georgia can benefit from easy access to the mented by actions that directly target the sources of European Union and regional markets if it tackles immobility among the rural population, which are connectivity constraints. not well-understood at this time. It is important to Strategies: In today’s globalized economy, logistics create opportunities for women—especially rural are as important as hard infrastructure and Georgia women in unpaid jobs—to join the workforce, as has a significant deficit in this space. Specifically, they are particularly vulnerable to being left out of upgrading the port of Poti, which is often congested, the labor market. by improving its restricted draft and increasing stor- age capacity, would help to strengthen the develop- Priority #5 Modernizing agriculture and leveraging ment of a container supply chain along the Caucasus tourism potential. Transit Corridor. Rationale: A key driver of economic dualism is the Priority #3: Upgrading skills for the new economy. limited dynamism of the rural economy, which remains highly labor-intensive but also highly Rationale: If Georgia’s economy can create more and unproductive. Thus, modernizing agriculture and better jobs, its workers will need to be ready to avail leveraging tourism potential would have the benefits themselves of the new opportunities. But although of: (i) improving livelihoods for those who choose the country has effectively addressed constraints in to remain in rural areas; (ii) freeing up excess labor access to education and training, the quality of these that can be more effectively deployed in Georgia’s services remains very poor. Shortcomings are par- dynamic cities; and (iii) enhancing Georgia’s export ticularly important in the soft skills (ability to learn, competitiveness. leadership, autonomy, languages) that are in high- Strategies: To make agriculture more productive and est demand in the new economy. Skills shortages are increase its potential for commercialization, Georgia also apparent in specific sectors (textiles and apparel, will need to develop effective land markets, adopt a hospitality, and agriculture), where they hamper value-chain approach to production to ensure that prospects for moving up the value chain. complementary inputs are available for commer- Strategies: A broad-based strategy of quality upgrad- cialization, and upgrade the capacity of producers to ing in the educational system will need to be com- meet export standards. To expand Georgia’s potential plemented by targeted efforts to supply Georgia’s in tourism, the main priorities include: (i) removing leading sectors (tourism, textiles, energy) with connectivity bottlenecks (internal and external); (ii) the occupation-specific skills that are currently bridging specific skills gaps in hospitality; and (iii) missing. In specific areas, this may even require developing quality standards for the industry. Chapter 6: Prioritization 57 Priority #6: Maintaining a sustainable fiscal and of each dollar spent, specifically with regard to the financial position. management of the UHC program; and (iii) moni- tor and address contingent liabilities that could stem Rationale: Sound macroeconomic stance matters for from state-owned enterprises operations, PPPs and growth and inclusion alike. Macroeconomic sta- public power agreements. bility is key for investment—particularly FDI for which perceptions of country risk are critical. From this standpoint Georgia has a solid track record of Priority #7 Preserving the environment. prudent fiscal and financial sector management and Rationale: Preserving Georgia’s natural environment flexible exchange rate policies, which will be impor- is a pro-poor and pro-growth imperative. Most of tant to maintain. On the fiscal front, the recent crises Georgia’s poor live in rural areas and depend directly and the introduction of universal health care have on the environment for their livelihoods. Moreover, both put pressure on the budget and raised the bar the country’s nature is also a key economic asset, with for policymaking. Ensuring that adequate fiscal space recognized potential in tourism and organic farming. is maintained will be critical for the state to be able Strategies: To ensure that economic development to build its infrastructure stock and deliver essential goes hand in hand with environmental protection, social services. the focus should be on sustainable natural resources Strategies: To continue to build the country’s stock management. This would include: (i) investing in of human and physical capital, policymakers will environment quality monitoring; (ii) developing need to: (i) develop a medium-term fiscal policy frameworks for the sustainable use of forest and framework that balances the objective of support- mining resources; and (iii) promoting integrated ing the economy, while maintaining a sustainable water-basin planning in the context of hydro- macroeconomic stance and rebuilding a cushion to power development. respond to future shocks; (ii) make public expen- diture more efficient so as to maximize the impact BOX 6.1 Knowledge Gaps While this Systematic Country Diagnostic has contrib- • The existing incentives and obstacles to registering uted to a better understanding of the drivers of economic informal firms, which could explain high levels of firm growth, poverty, and inequality dynamics in Georgia, there informality and self-employment in Georgia. remain several knowledge gaps that would benefit from • Detailed firm-level productivity analysis, which could further investigation. potentially be based on the national enterprise, busi- ness environment, and investment climate surveys, • The underlying causes of “economic dualism,” which trade data, and other firm-level surveys. currently inhibits an optimal use and deployment of the • Constraints to competition in Georgia and weaknesses country’s human capital; constraints on mobility and in the judicial system. urban-rural territorial inequalities and their implica- tions for policy, particularly in the context of a shrinking Quality of health care and the unit cost of health care ser- population. vices provision. Source: Georgia SCD team. Progress on Poverty and Shared Prosperity 59 APPENDIXES Progress on Poverty and Shared Prosperity 61 APPENDIX A POVERTY MEASUREMENTS In recent years, several poverty lines have been estimated at GEL 130 per month for an adult in 2015. used to measure poverty in Georgia. Though inter- Before the introduction of this absolute poverty line, national best practice is to use an absolute poverty the poverty rate in Georgia has been calculated at line to measure poverty rates within the country, US$2.5 per day per average person (2005 purchasing Georgia has been monitoring poverty using a relative power parity). The poverty trend for the country is poverty lines. With the adoption of the Sustainable broadly very similar irrespective of the poverty line Development Goals, the country has gradually begun used. In the analysis to be presented in this report, reporting and monitoring poverty based on an abso- the national poverty line will be used for all Georgia- lute poverty line. This new poverty line is estimated specific analysis with an international line being used using the Cost of Basic Needs method, which cal- whenever it becomes necessary to compare the coun- culates the money needed for covering a minimum try with other countries in the world. basket of goods for decent living. This amount was Progress on Poverty and Shared Prosperity 63 APPENDIX B GEORGIA – A SHORT POLITICAL HISTORY Soviet Union as an independent state in 1991, 2003 following mass demonstrations, widely known Georgia become the arena of conflicting interests. as the Rose Revolution. Tense relations with the Russian Federation have The Rose Revolution was a pro-Western peaceful been further exacerbated by Moscow’s support for change of power in Georgia in November 2003. The the separatist regions of Abkhazia and South Ossetia. revolution was brought about by widespread pro- These tensions between Moscow and Tbilisi flared tests over the disputed parliamentary elections and up into an armed conflict in August 2008, which culminated in the ouster of President Shevardnadze, resulted in hundreds of casualties and thousands which marked the end of the Soviet era of leader- of refugees. ship in the country. The Rose Revolution triggered Georgia aspires to become part of the European new presidential and parliamentary elections, which Union (EU) family, has ambitions to join North established the United National Movement (UNM) Atlantic Treaty Organization (NATO), and its troops as the dominant ruling party. Following the Rose serve in Afghanistan as part of International Security Revolution, Georgia pursued a distinctly pro-West- Assistance Force operation. The US has a major stra- ern foreign policy and declared European and Euro- tegic interest in the country, having invested heav- Atlantic integration as its main priority. This change ily in an oil pipeline from Azerbaijan via Georgia to in direction contributed to Georgia’s tensions with Turkey. There is an increased US economic and polit- the Russian Federation, which continue to this day. ical influence in the country, along with Georgia’s Following the explicit declaration of its pro- aspirations to join NATO and the EU. Western aspirations, Georgia lost the cheap energy to which it had access during the Soviet period. As rela- Post-Soviet Years tions between Georgia and the Russian Federation Following the collapse of the Soviet Union in 1991, deteriorated, Moscow tightened the economic screws, Georgians overwhelmingly voted for the restoration subsequently ripping out trading ties and introduc- of independence and elected nationalist leader Zviad ing sanctions, which caused Georgia’s economy to Gamsakhurdia as president. However, he was soon nose-dive. Georgia has been heavily dependent on overthrown by opposition militias, which in 1992 the Russian Federation for its energy supply. Similar installed former Soviet Foreign Minister Eduard to some other states of the former Soviet Union, it Shevardnadze as the country’s new leader. His 11 saw the price of gas supplied by the Russian gas giant years in office were controversial as the govern- Gazprom rise sharply in January 2006. Gazprom has ment was not able to control crime and corruption. since doubled the price again. The most recent devel- President Shevardnadze was ousted in November opment, however, is that in January 2017 Georgia 64 Georgia: From Reformer to Performer signed an agreement with Gazprom, according to percent of the vote, winning 85 seats in parliament. which it will shift to a system of financial compensa- The governing UMN took 40.34 percent. President tion with this energy giant for the transit of Russian Mikheil Saakashvili conceded that his party had lost gas through Georgia into Armenia. The govern- and pledged to support the constitutional process of ment decided to sign a new two-year agreement forming a new government. with Gazprom as the former agreement expired on In June 2014, Georgia signed an Association December 31, 2016. The new agreement entails mon- Agreement with the EU. The Agreement, which etary compensation for the transport of Russian gas includes a Deep and Comprehensive Free Trade to Armenia through Georgia in place of the former Area, marks several years of cooperation between arrangement, which afforded Georgia 10 percent of Tbilisi and Brussels under the Eastern Partnership all natural gas transported through the country. program, and represents the first step on Georgia’s Since independence, the people of Georgia have journey toward membership. It describes the gradual endured periods of civil war and unrest, as well as improvements needed in areas such as trade, envi- violence related to the independence aspirations ronment, agriculture, tourism, energy, transport and of the breakaway regions of Abkhazia and South education to bring Georgia into line with EU stan- Ossetia. Both regions had close ties with Moscow, and dards. Overall, the process is focused on democracy following the August 2008 events in South Ossetia and the rule of law, human rights, good governance, and the subsequent five-day armed conflict with and economic development. the Russian Federation, the latter announced it was On February 2, 2017, the European Parliament formally recognizing the independence of Georgia’s voted in favor of visa-free travel for Georgian citi- breakaway regions. Despite the ceasefire negotiated zens to the Schengen Area at a plenary session. under the heavy international pressure and diplo- Starting in spring, Georgian citizens will be able to matic intervention from a number of international travel visa-free to most countries of the European leaders, Russian troops still remain entrenched in Union. Holders of Georgian biometric passports will the sovereign territory of Georgia. Their continued now be able to enter the Schengen Area for 90 days movement of borders closer to the strategic East- within any 180-day period for holiday, business and West Highway and the Georgia-Azerbaijan pipeline other purposes except for that of working. European is widely referred to as “the creeping occupation”. Parliament and Council negotiators struck a deal on The consequences of the international conflict, visa-free legislation last December. The visa waiver the global financial crisis of 2008, and the growing for Georgia will enter into force simultaneously with number of human rights violations in the country, the visa-suspension mechanism, on which EU insti- created a fertile ground for a popular discontent tutions have already reached an agreement. with the UNM. Consequently, the opposition was The Georgian Dream party is in its second term, formed to challenge the incumbent party in the having won 2016 parliamentary elections in October 2012 elections. 2016. However, despite a convincing showing of The Georgian Dream – Democratic Georgia 48.65 percent of the votes, a number of indepen- was the party which consolidated the opposition dently conducted polls show the public’s confidence momentum in Georgia. Established on April 19, in the party’s abilities and goodwill waning. The cur- 2012, by the businessman Bidzina Ivanishvili, the rent dissatisfaction can be attributed to a number party evolved from the public movement Georgian of factors, with unemployment being major among Dream, launched by him as a platform for his politi- them. The recent nosedive of national currency cal activities in December 2011. The party suc- value (from GEL 1.7 to US$1.00, down to GEL 2.7 cessfully challenged the ruling UMN in the 2012 to US$1.00) against the U.S. dollar has exacerbated parliamentary election. It won this election in coali- these concerns. tion with six other opposition parties, with 54.97 Progress on Poverty and Shared Prosperity 65 APPENDIX C FIRM DYNAMICS FIGURE C.1 FIGURE C.2 Average Firm Size Has Been Falling over the Years… …Although Less Intensely in Manufacturing Relative to size in 2006, by type of firm Bulgaria and Georgia, manufacturing 1.6 1.6 1.4 1.4 1.2 1.2 Firm size Firm size 1.0 1.0 0.8 0.8 0.6 0.6 0.4 0.4 2006 2007 2008 2009 2010 2011 2012 2013 2014 2006 2007 2008 2009 2010 2011 2012 2013 2014 All SOE Legal Individual Bulgaria Georgia Source: Jobs Diagnostic, World Bank Group. Source: Jobs Diagnostic, World Bank Group. Note: State-owned enterprises comprises sole state owners and mixed ownership. Note: State-owned enterprises comprises sole state owners and mixed ownership. FIGURE C.3 Increasingly, Firms Display More Dynamism over Their Life-Cycle Employment over life-cycle in the cross section Source: Jobs Diagnostic, based on Business Survey from GeoStat. Progress on Poverty and Shared Prosperity 67 APPENDIX D SECTORAL MINI-DEEP DIVES Four sectors display high potential as drivers of percent of the workforce. About 83 percent of those export-led growth, namely commercial agriculture, employed in agriculture are self-employed,1 pointing energy, textiles and garments, and tourism. The first to the main function of agriculture being to provide two are sectors in which Georgia has a latent com- a safety net for hundreds of thousands of underem- parative advantage, with significant endowments ployed individuals living in rural areas. Small farms that could be better exploited. The latter two are dominate the sector, accounting for 96 percent of the sectors in which Georgian firms are gradually seiz- arable crop area and over 96 percent of cattle and ing the opportunity that integration into global sheep as of 2015. Unorganized, operating on small markets provides, but where there is substantial plots of land,2 and lacking in skills, infrastructure, scope for growth. The following sections describe and essential support services, many of Georgia’s their performance over the years and the prospects, smallholders remain in agriculture due to old age, together with the obstacles, that are holding back emotional attachment to their land, and a lack of their growth potential. other opportunities. Agriculture has unexploited potential. The agro- food industry is a major employer in developed Commercializing Agriculture economies and this sector has strong commercial The performance of the agricultural sector has potential in Georgia, thanks to fertile land, favor- been disappointing over the past two decades. able agro-climatic conditions, ample water resources, Agriculture remained a mostly unproductive sub- and unique traditions (for example, in winemaking, sistence activity. Georgia is a traditional agrarian honey, and so on). Growth opportunities stem from country with about 40 percent of its territory con- the rapid expansion of high-value fruit and vegetable sisting of agricultural lands and 46 percent of the consumption in traditional CIS markets, improved population living in rural settlements. However, the access to the European Union (EU) and Chinese performance of Georgian agriculture has been poor markets as a result of trade agreements, and growing compared with that of other transition economies. domestic demand. Gradual commercialization of the The share of agriculture in gross domestic product sector can be a great avenue for lifting rural popula- (GDP) fell from around 50 percent in 1994 to less tion out of poverty. than 10 percent in 2016, a much steeper decline than Two fundamental challenges include deficient seen in other Commonwealth of Independent States agricultural “hardware” and outdated “software.” (CIS) countries. Despite its insignificant contribu- The first includes excessive land fragmentation, aged tion to the economy, the sector employs about 52 plantations, infrastructure bottlenecks, and a lack of 68 Georgia: From Reformer to Performer capital. Dealing with hardware issues would require or expensive to produce (for example, kosher, halal, time and well-coordinated public and private invest- biodynamic, or organic fruit). However, few of the ment. The “software” challenge relates to skills and Georgian small farms have the appetite or capacity to knowledge deficits among Georgia’s rural popula- introduce such changes. tion, low motivation to learn, a culture of informal Low productivity and dismal business practices business dealings between friends and relatives, as limit the integration of smallholder farmers into well as weak capacity of the public sector to deliver modern value chains and growth of processing modern services. This is incompatible with modern companies. Smallholder farmers are not capable of international standards and organizational practices, delivering the supply of raw materials of satisfactory and a major barrier for inclusion in modern value and consistent quality and sufficient quantity. They chains (export, retail, and processing). also tend to renege on long-term supply contracts if presented with short-term opportunities. Another supply-related issue, which is likely to become more Organization of the Sector: Vertical and Horizontal of a problem as EU-style sanitary and phytosanitary Fragmentation standards are enforced, is the lack of documentation Land fragmentation is one of the major barriers for throughout the production cycle. The fragmented the further development of agriculture. Currently, and uneven nature of the supply chain ultimately after three phases of agricultural land privatization,3 limits the ability of processors to fully utilize only 15–20 percent of land titles are registered. The installed capacities and increase scale. Problems with parcels allocated to the households, averaging 1–1.2 the supply chain can drive modern, export-oriented hectares in size, often lack access to basic infrastruc- food processing enterprises out of business and out ture. Many of them are unsuitable for individual of Georgia.5 farming activities and are used for pasture, or not Farmer cooperation has not yet demonstrated cultivated at all. Actual land use now deviates from consistent results in terms of improving agricul- the original land title documents for a variety of tural productivity and linking farmers to markets. reasons, such as inheritance, intra-family transfers, Cooperation among smallholders on service pro- informally recorded sales, and encroachment into vision, product consolidation, processing, brand- adjacent state land not supported by documentary ing, and marketing appears to be a promising way records. This causes disputes during land transac- to place Georgian niche products on international tions, creating a disincentive to lease, sell, or invest in markets, while preserving the country’s unique way land and undermining the value of land as collateral. of life and social fabric. However, most Georgians Land fragmentation also explains the prevalence of continue to associate farmer cooperation with Soviet small-scale farming. Union-style joint ownership of land and joint agri- Still, the main problem remains a lack of skills. cultural production, as opposed to joint processing, Fragmentation is an obstacle for scale-sensitive agri- branding, and marketing. This misconception was a culture, which relies on sophisticated machinery (for key reason for the failure of efforts to ignite a genu- example, grain and oilseed), or production and mar- ine farmer cooperation movement (box D.1). keting processes (mass winemaking). However, an Excessive fragmentation in the downstream increasing number of agricultural activities are not segment of agricultural value chains is another scale-biased. Technological innovations that signifi- obstacle for consolidation of Georgia’s agricul- cantly boost agricultural productivity can be intro- tural exports. For example, the export of manda- duced by small-scale farmers.4 This includes simple rins in Adjara is handled by several dozens of small, changes in cultivation and orchard management poorly equipped and managed sorting and packag- techniques, skilled use of fertilizer and pesticides, ing centers. These centers compete for raw materials reduced postharvest losses thanks to better storage, among themselves and with four larger processing packaging, and transportation and stronger links plants. However, each one is too small to afford the with other value chain actors. This is fully applicable kind of specialized sorting, calibration and packag- to the kind of labor-intensive niche agriculture where ing equipment that would allow placing Georgian Georgia has the capacity to be competitive (kvevri mandarins in the premium segment—modern wine, hazelnuts, and, potentially, kiwifruit) and in retail networks. Most commonly installed sorting high value-added niche products that are difficult, and calibration lines are not tailored for mandarins, Appendix D: Sectoral Mini-Deep Dives 69 BOX D.1 Fostering Farmer’s Cooperation in Georgia: Lessons Learned Most cooperatives were registered to be eligible for con- genuine stake in the development of Georgian agriculture. Driven cessional funding. While this support allowed beneficiary by the 3-to-4-year funding cycles of most development-partner enterprises to upgrade their production or processing facilities, organizations, their business model is not compatible with the it did little to further genuine farmer cooperation. Therefore, for long-term task of fostering sustainable farmer groups. Private sec- development-partner and government assistance to be better tar- tor players, particularly buyers of agricultural products, are better geted, the criteria for farmer cooperatives should be tightened. positioned to provide the necessarily leadership and expertise, Features that can help distinguish genuine farmer cooperatives given that they have a long-term interest in developing the capac- include: (i) participation of a relatively large number of farmers ity of farmer groups. with a relatively equal distribution of control; (ii) the main goal of There is a role for government and development-partner cooperation is product aggregation, storage and processing, not organizations in catalyzing business engagement with production per se; and (iii) presence of strong leadership, provided farmer groups. For example, governments could incentivize pri- by a trusted external broker such as government, a local religious vate players through land concessions conditional on engagement leader, or business seeking to develop its supply chain. with smallholders and smallholder groups. The World Bank expe- International nongovernmental organizations (NGOs) rience in building “productive alliances” involving smallholder are not necessarily the best enablers of cooperation. While farmers and downstream actors in Latin America may provide able to apply for and manage development-partner funds, such useful insights. NGOs often lack the relevant agronomical, food processing, indus- trial management or marketing expertise. They do not have a Source: Livny and Maximov 2017. physically damaging the fruit; mandarins are typi- PPD would help better understand and address cally packaged in low quality plastic, which results private sector constraints to development. In the in additional damage and transportation losses. For medium-term, these could evolve into industry now, practically all Georgian mandarins are sold in associations to support export promotion, stan- the lowest price segment of the market. dard setting and industry compliance. Going forward, policymakers will need to cre- • Compliance with food safety and quality stan- ate the conditions for consolidating the sector dards. Georgia has invested heavily in building and attracting private investment in agro-food the capacity of the NFA, harmonizing food safety industry. Private sector investment is unlikely to be legislation with EU legislation in line with the forthcoming until there is a critical mass of farmers DCFTA, and developing disease control strategies. producing the consistent quality needed by buyers. However, ensuring compliance in an environment While efforts to promote further farmers’ coopera- of high sector fragmentation will be a challenge. tion should be continued, a broader set of measures Industry associations can be instrumental in driv- is needed to help address the fragmentation of the ing compliance with standards. sector, including: • Easily accessible templates of legal, financial and commercial documentation for transactions • Land market development. While small farm- along the agribusiness value chain. Ideally, rel- ing can be efficient, formalizing/legitimizing land evant templates should be developed and made property rights will be fundamental for attracting freely available in three languages (Georgian, greater investment in agriculture. Russian, and English). This would reduce trans- • Value-chain infrastructure, including storage action costs, help track transactions at various and sorting facilities. While public-private part- parts of the value chain, and provide Georgian nerships in value-chain market infrastructure companies with the possibility to legally defend are currently not commercially viable, they could their interests. become feasible once irrigation and other sup- porting services are in place. Access to Finance • Public-private dialog (PPD) to inform strategy and actions for agriculture development and Concessional financial resources offered to agri- promote greater producer-buyer coordination. business companies have not addressed access to 70 Georgia: From Reformer to Performer finance problems. Many IFIs implement financial commodity price fluctuations. Farmers produc- and technical assistance programs targeting Georgia’s ing for the local market typically do not have agricultural sector. Georgian farmers and agribusi- long-term supply contracts and are often forced nesses are also offered generous subsidies through to sell into the glut. These commercial risks are government programs such as “Plant in Georgia” and exacerbated by poor protection against hail, cold, “Produce in Georgia,” which help offset investment draught, and weather episodes, which can cause costs. Yet, farmers continue to be strained as far their significant delays and spoilage of fresh produce CAPEX and working capital needs are concerned, exported via sea routes. and report access to finance as a key bottleneck (fig- ure D.1). There are three key aspects to this issue: Addressing underlying failures of agro-credit market needs to be prioritized over the provision • Georgia’s agricultural sector is not ready for engage- of subsidized credit. Promoting supplier finance ment with commercial banking. Management could be a more feasible solution in the short to capacity within Georgia’s farming small and medium-term, while efforts to reduce risks in agri- medium enterprises is very limited. There is little culture would pave the way for farmers’ engagement ability to generate project ideas and put them on with the commercial banks in the longer-term. Some paper in the form of a business plan for review by of the large processors are already engaged with their the banking sector. suppliers in tolling schemes (providing cash, inputs • While there is interest from financial intermediar- and technical assistance with cultivation, posthar- ies to enter the agricultural market, they lack sector vest treatment, packaging, and transportation in knowledge and the ability to properly assess credit exchange for product supply). Further assistance in proposals. Lacking capacity to correctly assess the the formation of long-term links to the private sector value of agricultural assets, banks tend to pose (buyers of agricultural products) is desirable. A range relatively high collateral requirements. Use of of measures to reduce agricultural risks to commer- commodity stock as collateral is very rare. Given cially acceptable levels is still needed. Government the absence of reliable historical data, insurance guarantees could be used to reduce the risk of lend- products are priced at a level that most Georgian ing to exporters operating under long-term supply farmers cannot afford. contracts. Investment in early warning and preven- • Georgia’s agricultural sector is subject to very high tion systems (improvement of irrigation, anti-hail commercial risks. Producers of mass export com- systems, spraying and vaccinations) could prevent or modities, such as hazelnuts, are subject to global reduce weather-related risks. FIGURE D.1 Growth Constraints for the Success of Small and Medium Farming Enterprises Access to finance Unfavorable weather conditions Access to assets (land, machinery, and so on) Access to inputs (seeds, fertilizers, and so on) Access to markets (including infrastructure) Access to skilled labor Government regulations (taxes, business environment, food safety, and so on) Access to information Market instability (including price fluctuation) Diseases Other 0 0.1 0.2 0.3 0.4 0.5 0.6 Percent 2014 2016 Source: The annual survey of ENPARD-supported cooperatives, 2016. Appendix D: Sectoral Mini-Deep Dives 71 Infrastructure, Logistics, and Supporting Services centers, but their commercial viability remains ques- tionable; a substantial quantity of machinery and Labor-intensive, high-value crop production such equipment is either redundant or underutilized.6 as for fruits and vegetables fundamentally depends The acute shortage of reliable farm machinery and on reliable and affordable irrigation services, operators, postharvest treatment contractors, cold which are currently lacking. Irrigation services stores and grain stores, and specialized food indus- which served close to 400,000 hectares during the try logistics is compelling foreign investors to spend Soviet era have been on constant decline since inde- considerably more on on-farm infrastructure and pendence. The area served fell from 160,000 hectares specialized machinery than would be the case in in 2000 to 40,000 hectares in 2014. more developed jurisdictions. While transport infrastructure is not reported Modern extension services remain underde- as a major constraint for agribusinesses compa- veloped. Globally, extension services enable small nies, related logistics services are significantly farmers to increase their productivity by helping underdeveloped and major border crossings are them introduce new technics, access required inputs problematic. Georgia is relatively well connected and machinery, establish links with potential buyer, to the EU and Eurasian markets by road and ferries and so on. Engaging local expert growers in exten- calling several ports on the Black Sea. Ports also pro- sion services proved to be more effective than rely- vide the possibility of transshipment to destinations ing on service providers lacking practical experience. in North America, Europe and Asia. However, access Many development partners provide various types to sea transportation is strained in the high season as of extension services in Georgia, but these initiatives Georgian exporters compete with Armenian freight remain fragmented. The MOA formally established forwarding companies, which results in very high about 60 Information and Consultation Service prices. Access to the Eurasian market is also con- offices in 2013. While these offices hold numerous gested, particularly in winter months. Following informational brochures, their staff is rarely qualified the 2008 Russo-Georgian war, the Larsi border has to answer professional questions, or deliver exten- become Georgia’s (and Armenia’s) main access sion services. point to this vast market creating major bottlenecks Other supporting services, such as weather fore- for exports into the traditional Russian Federation casting, soil testing and mapping, agronomical or CIS markets. Frequent delays on the Military research and development, are also poorly orga- Georgian Highway—caused by icy road conditions, nized. Meteorological services are provided by the avalanches or landslides—often paralyze Georgian Georgian National Environmental Agency, but they exports. The situation with perishable, temperature- are relatively costly.7 Reportedly, Georgian farmers sensitive exports over Larsi is further exacerbated by tend to rely more on reputable international weather the low quality of trailers involved in the operation. forecasts. The procedure of soil tests conducted by The inability of smallholder farmers to access the Scientific-Research Center of Agriculture and machinery is an additional constraint (figure D.1). required to obtain funding under a state subsidy In the 2000s, the government implemented a series program, involves unnecessary bureaucracy. Large of machinery programs that involved large interna- agribusinesses with foreign participation prefer to tional tenders for machinery, which was distributed independently test soil samples overseas due to lack on preferential terms of finance. This failed to pro- of trust in domestic services. More granular soil vide the diversity of equipment needed or to estab- maps identifying the most optimal crops would be lish functional service networks. In the second half helpful for framers to identify new crops to grow. of the 2000s the Millennium Challenge Corporation (MCC) helped establish 21 private machinery ser- Developing Tourism vice centers. In parallel, MCC established 33 farm service centers offering a broader range of services Georgia’s tourism sector is a strong contribu- and advice to farmers. In 2009, in the attempt to rep- tor to GDP, exports and employment. Between licate MCC’s success, the MOA established 13 state- 2009 and 2016 Georgia, achieved one of the fast- owned machinery service centers. These competed est rates of tourism growth globally. Total arrivals poorly with privately-owned peers. The current gov- more than quadrupled over this time, reaching 6.3 ernment aims to privatize the state-owned service million in 2016, of which about half were tourists. 72 Georgia: From Reformer to Performer Travel services became the largest and most dynamic Accessibility export sector (figure D.2). In 2016, tourism directly accounted for an estimated 7 percent of GDP Air connectivity requires further strengthening. and employed 100,500 people (5 percent of total The aviation market has demonstrated considerable employment).8 Accounting for indirect impacts, this growth in the past few years. Total passenger traffic sector generated some 24 percent of GDP and sup- increased by 25 percent in 2016, making Georgia one ported around 350,000 jobs.9 Total export receipts of the fastest growing aviation markets in the world. from tourism increased from US$475 million in All three international airports and one domestic 2009 to US$2.1 billion in 2015 (figure D.3), which is airport comply with the International Civil Aviation three times higher than the total receipts generated Organization standards. Several airlines, including by traditional agriproduce. At the same time, efforts low cost carriers, have added capacity or launched to diversify the profile of foreign travelers have not services to Georgia in past few years; this trend is yet born fruit. While progress was made in attract- expected to continue. However, the number of tour- ing additional visitors from Europe, Asia, the Middle ist arrivals by air is relatively low. During 2016, only East, North America, and Latin America, over 80 per- 1 million visitors (16 percent of total visitors) trav- cent still arrive overland from Azerbaijan, Armenia, eled to Georgia by air.10 The main constraints are the Turkey, and the Russian Federation. high level of airfare and airport taxes and insufficient Georgia needs to maximize its tourism sector capacity of the airports to accommodate growing potential. The underlying assets of the sector are interest of international carriers. sound and include history, cultural heritage, nature, Road access and transport services are improv- wine and gastronomy, sea coast, and so on. Many ing but still present limitations, especially to inde- natural and cultural assets are located in the rural pendent travelers. The government has given the areas and remain underutilized due to insufficient highest priority to improving the East-West high- marketing efforts, poor connectivity, unsatisfactory way (Tbilisi, Adjara, Turkey) and the North-South customer services or accommodations, or limited corridor (Russian Federation, Georgia, Armenia). industry specific knowledge on how to develop the These roads are vitally important for transporta- promising segments of the sector considering emerg- tion and tourism. Smaller rural roads vary in qual- ing global megatrends in the industry. The latter ity and maintenance, and many areas of the country includes the rise of technology mediated experience, are often cut off during the winter months. Bus growing demand for local authentic travel, the rise networks are poorly developed, while many prime of millennial and third age travel. These trends will areas for nature and adventure-related development catalyze significant changes in demand and competi- are only accessible in off-road vehicles. Road safety tion dynamics. remains a serious issue. FIGURE D.2 FIGURE D.3 Services Exports Georgia Tourist Arrivals and Expenditures Georgia and comparators, 2005, 2010, and 2015 2010–17 3,500 US$, millions and tourists, thousands 3,000 3,000 2,500 2,500 US$, millions 2,000 2,000 1,500 1,500 1,000 1,000 500 500 0 2005 ‘10 ‘15 2005 ‘10 ‘15 2005 ‘10 ‘15 0 Georgia Armenia Moldova 2010 ‘11 ‘12 ‘13 ‘14 ‘15 ‘16 ‘17e Goods-related services Transport Travel Other services Expenditure (US$, millions) Tourist arrivals (thousands) Source: World Bank Group staff calculations based on data from the United Nations Source: World Bank Group staff calculations based on data from the United Nations Conference on Trade and Development. Conference on Trade and Development. Appendix D: Sectoral Mini-Deep Dives 73 Poor management of circuits and itineraries, which requires smaller, more modern and more including trail maintenance and marking, as well upscale resort facilities. Many heritage sites lack as operating trails and interpretive services. Most road access, nearby accommodations facilities and of the popular sites are under the protection sta- related infrastructure. tus managed by the Agency of Protected Areas of The preservation and sustainable commercial- Georgia, but there is no national system of trail map- ization of Georgia’s environmental and cultural ping, and therefore no national certification criteria heritage are of critical importance. It is important for the trails system. that authorities, businesses, and residents of touris- tic areas recognize the value of natural and cultural Hospitality Infrastructure and Services assets, and that preservation plans are developed and enforced. This refers to a spectrum of issues that Low quality of services and knowledge gaps affect the quality of the product offering, including impede emergence of high value-added activities. littering, waste management, pollution and bio- Hospitality services including tour operators, hotel diversity protection, heritage conservation, traffic personnel, transport services providers, are weak. congestion, social issues such as inclusion and inter- In addition to industry specific skills, language and nally-displaced persons, as well as the sensitive devel- digital skills represent a major bottleneck for devel- opment or restoration of tangible and intangible opment in the new era of technology mediated travel cultural heritage. While there are several regulations experiences and rising customer services demands in place, their enforcement remains challenging. (see appendix B). To this end, expanding training One of the most important needs for heritage opportunities for Georgians—particularly in rural sites is to adopt a standardized visitor management areas where the greatest tourism potential lies is key. process. With an overwhelming number of histori- The education efforts should consider not only the cal monuments and a limited budget, some sites are needs of the relatively established product offerings, neglected, and are not able to provide high quality but also those of other promising market segments interpretation or visitor services. It will be impor- (for example, health and wellness, conferences, tant to introduce “site management plans,” train local and exhibitions). professional staff and improve supporting infra- Large variation in standards and quality of structure. This would help more fully realize their products and services deter upper scale travelers economic potential, while preserving sustainability. from nontraditional destinations. Some regula- Developing the tourism sector along the whole tory control will be needed in the future, particularly value chain should be prioritized. The increase in response to: (i) minimum standard expectations of the foreign content in Georgia’s exports is likely of larger international tour operators; (ii) demand linked to the rapid development of the tourism sec- of certain segments such as the third age travel- tor, which heavily relies on foreign input. The oppor- ers, and (iii) requirements for soft adventure mar- tunities to integrate domestic suppliers, particularly kets (for example, skiing) where safety standards among agriproducers and family businesses provid- are important. ing hospitality services, should be explored more There is a gap in the market for affordable class actively. Improving the skills set of family businesses quality hotels. Georgia attracted world class hotel and expanding quality and diversity of agriproduce brands, which are expanding their assets along will be critical. with smaller domestic investors. It is estimated that Georgia’s tourism accommodation capacity will Realizing Energy Sector Export Potential expand by 40 percent over next two years.11 Hotel properties affiliated with the international chains, Georgia’s energy sector underwent a major trans- offering reliable quality, account for about 10 per- formation over the past two decades. In the early cent of the market. They operate mostly in the 4–5 2000s, in most areas outside Tbilisi, electricity supply stars’ segment, while affordable class hotel seg- was limited to less than six hours per day. Power theft ment remains significantly underpenetrated; this and illegal connections were rampant. Technical and deters certain traveler types from visiting Georgia. commercial losses amounted to over 50 percent. By Outdated hospitality infrastructure is the primary 2007, the tariff reforms and greatly improved pay- challenge for the development of the Black Sea cost, ment discipline allowed for uninterrupted power 74 Georgia: From Reformer to Performer supply across country. The sector has been unbun- FIGURE D.4 dled into generation, transmission and distribution Price of Electricity Georgia and comparators, 2016 companies. The regulatory framework has become more predictable, straightforward, and investor- Germany Italy friendly. The tariffs allow reasonable cost recovery Poland and return on assets, taxes are relatively low, licensing Slovenia is simplified and power exports are allowed. These France developments attracted significant investment in the Georgia Albania sector and enabled the expansion of available power Romania generation capacity. Georgia is also implement- Serbia ing extensive plans for reinforcing the transmission Kyrgyz Republic network. Furthermore, Georgia gained substantial 0 5 10 15 20 25 30 benefits from gas transit from Azerbaijan to Turkey US¢ per kilowatt hour and from the Russian Federation to Armenia. Gas Source: World Bank 2016a. received at a below market price or as an in-kind payment for gas transit meets 41 percent of Georgia’s total gas demand. This benefit is passed to residential is guaranteed to be available). Hydropower accounts consumers in the form of low gas tariffs and used for for up to 90 percent of total electricity generation in thermal generation. wet years. During the summer, current capacity fully However, access, reliability, and affordability meets domestic power demand and allows for up of electricity supply continue to be perceived as to 600 gigawatt hours per year of exports to Turkey. obstacles for business activities. In the latest avail- During the winter, Georgia relies on more expensive able BEEPS (2013), almost 40 percent of medium thermal generation and imports, (1 terawatt hour per firms ranked it as a major constraint. In the next five year of energy), mostly from the Russian Federation. years, the implementation of the current govern- The planned decommissioning of old thermal units ment plan for hydropower development may require by 2021, will further increase the deficit of firm tariff increases by an estimated 85 percent by 2023.12 capacity to meet winter peak demand (figure D.5). Limited power supply diversification under- World Bank analysis shows that combined-cycle mines its reliability. The total installed power gas turbine power plants are the lowest cost option generation capacity of the country is about 3,600 to fill this gap, which is also comparable to the cost megawatts, of which about 40 percent is firm (that of energy imports from the Russian Federation.13 Energy efficiency improvements and switching from electric heating to other heating options can play a FIGURE D.5 Electricity Supply and Demand Projections, 2015–25 role in reducing the winter supply-demand gap. The reliability of the distribution system is emerging as an issue for the new power plants. Many distribution networks are in urgent need of strengthening. HPPs connected to the distribution grid reportedly have experienced frequent inter- ruptions. Although technical and commercial losses have been significantly reduced in recent years, further improvements are desirable. The transmis- sion and distribution tariffs are regulated according to the cost-plus principle, so distribution compa- nies have limited incentives for reducing losses and improving efficiency. Excessive dependence on hydropower for winter supply exposes the country to hydrological risks. A more systematic assessment of environmental and social impacts is needed, including of cumulative impacts from the development of multiple HPP in Source: World Bank 2016b. the same river basin. Water use rights will become Appendix D: Sectoral Mini-Deep Dives 75 a more serious issue when more HPPs come online Access to export markets will be vital to make (some with storage capacity). The right steps are the current and planned development of Georgian being taken to create a coordinated approach to hydropower viable, given the natural limits to managing water resources, and to introduce a permit domestic demand. Turkey has been an attractive for water use rights. market for electricity exports. However, the mar- Further reforms are needed to enable an inter- ket has recently slowed down considerably and the nal electricity market. There is no short-term power price differential has been reduced and even market; most electricity is contracted by long-term reversed. While Turkey’s long-term outlook looks public power agreements between generators and promising, enabling power exports would require ESCO. There is no balancing and ancillary services a more comprehensive regional power trading market. Balancing (covering day head planning and approach, whereby Georgia would establish itself as real time operation) is done by the Georgian State a regional trading hub. Electrosystem as Dispatch Licensee. ESCO calculates To unlock the significant potential for regional the balancing price monthly and settles the differ- power trade, Georgia needs to expand its cross- ence between actual and contracted energy. border transmission capacity, possibly with pri- The prospects of further development of vate sector participation to reduce fiscal pressures. Georgia’s vast potential in renewable energy will Transmission and interconnection investments are depend on the performance of and access to the already planned or underway. Georgia transmission export markets. Georgia’s hydropower potential is plans include significant expansion of interconnec- estimated at 50 terawatt hours, the third-largest in tions with Turkey and reinforcement of the inter- Europe, of which 20 percent is developed. The poten- connection links with the Russian Federation and tial of wind and solar resources has not been well Armenia. The completion of these projects would assessed and the framework for wind, solar and other provide sufficient transfer capacity to enable benefi- renewable projects is not yet sufficiently developed. cial cross border trade between Georgia and Turkey. The further development of new generation capacity The additional link with the Russian Federation is is held back by subdued demand in the main export important to comply with system security constraints market, insufficient transmission capacity and unde- and stability. The link with Armenia (Back-to-Back) veloped domestic and regional power markets. is considered as important for the Armenian sys- With vast hydro-potential and a favorable geo- tem. The private sector can play a role in attracting graphic location the country could become an the needed investment in the grid infrastructure and energy hub. The country’s gross hydropower poten- thereby reduce the fiscal pressures if the government tial is estimated at around 15 gigawatts, of which creates an enabling framework and/or structures about 20 percent has been developed. If half of the public-private partnerships. remaining potential is developed for exports, it could Further development of the power sector regula- generate some US$1 billion of export receipts.14 tory framework and its alignment with the regional Georgia also has a significant locational advantage to frameworks will be critical to enable regional power exchange power between energy producers, such as trade. The specific policy actions to improve the reg- Azerbaijan and the Russian Federation with energy ulatory framework are spelled out above (see Section consumers like Turkey and Armenia. Furthermore, 3.1.1) and they are relevant for both domestic and Turkey has a large interconnection with Europe, export markets. Regulations which are particularly increasing power exchange potential in the future. important for cross-border trade are those around Potential exports to Turkey are significant—up to grid connection. The cross-border capacity alloca- 10.1 terawatt hours per year. In addition, Georgia is tion rules are currently being clarified, but some con- already becoming a natural gas hub, with gas tran- cerns remain about the development of the Turkish sit from the Russian Federation to Armenia, Georgia grid and its ability to wheel power. The Georgian and to Turkey, and then on to Europe (Southern Gas Turkish system operators are applying explicit capac- Corridor). These volumes are scheduled to increase ity auctions of the cross-border capacity at annual as additional gas is transited from Azerbaijan to and monthly auction rounds. Each party is respon- Turkey, bringing additional benefits in a form of sible for its import direction, and currently no net- transit fees and below market prices for the domestic ting of counter transactions is possible. There are consumption. users with priority rights and the rest of the capacity is auctioned. Current capacity is not fully exploited. 76 Georgia: From Reformer to Performer Going forward, potential HPP investors might fear workers will push wages up, compromising the main that there will not be enough capacity in the export source of comparative advantage that firms currently line if large HPPs come online. The total capacity of have: low wages. Therefore, coordinated efforts are all HPPs projects with memorandum of understand- needed. On the one hand, the government may con- ings is at least twice the present capacity of the cross- sider incentives to firms that do on-the-job training. border transmission line. Clear and transparent rules This type of training may generate spillovers (since for allocating cross-border capacity are key for the trained workers circulate across firms) and, there- investor confidence. To address this and other regu- fore, public interventions may be warranted (cur- latory, institutional and market barriers to regional rently, firms tend to train their workers at their own power trade, Georgia and Turkey will need policy expense, likely leading to a sub-optimally low amount decisions and a roadmap with coordinated measures. of training provided). On the other hand, vocational education interventions need to be strengthened, particularly those with focus on textiles and apparel Analyzing Textile Sector Potential and connected activities (for example, repairs of The analysis of performance in key global value sowing machines). In addition to this, as automation chain (GVC)-prone sectors suggests that it is in advances, new skills related to digital drawing, print- textiles and apparel that firms have managed to ers’ operations and template-making will be needed, integrate with international production networks. and will facilitate the creation of more and better Textiles and apparel, electronics, and vehicles tend paid jobs.16 to be sectors in which trade is dominated by GVCs. For Georgia to remain price-competitive to Of these sectors, it is textiles and apparel, where serve more than one destination policies focused Georgian firms have gained market shares. In 2015, on moving up the value chain need to take stock of every US$10,000 of world exports, US$1.5 origi- of crucial factors in existing success stories. While nated in Georgian firms, up from less than US$5 most of garment producers in Georgia focus on the in every US$1,000,000 in 2000. The potential for cut-make-trim segment of this value chain (with lit- growth in these and other sectors is exemplified by tle value-added as a share of the final output), some the market shares of Moldova that, due to the com- firms have moved up into original design, where bination of a DCFTA with the EU and its proxim- value creation and wages are substantially higher, ity to key players in regional value chains (Germany, and so are wages paid. The organization of the semi- Romania), has managed to integrate more actively.15 annual ‘Tbilisi fashion week’ has been a promotional Three products and one destination explain most platform for designers to venture into foreign mar- of Georgian exports of apparel. The destination is kets and gradually grow. The firms that focus on orig- Turkey, while the products are boy’s trousers, cotton inal design tend to be small and leverage alternative T-shirts and other T-shirts. In the first two products, business and distribution models. For example, they Georgian firms have substantial scope for quality heavily rely on e-commerce platforms to get their upgrading, as they currently are located at the bot- produce to their foreign clients. In these area, three tom of the quality distribution (among competitors challenges have emerged: (i) the lack of a payments in the same segment), as proxied by the unit value gateway in Georgia that allows foreigners to use they secure for these products. their credit cards to directly pay the Georgian firm; Georgia needs to build the skills of its work- (ii) the lack of clarity to handle clients returns from force to move up into fashion design. The main the point of view of Customs procedures (Customs obstacle that firms in the cut-make-trim segment considers the returned products as an import and of the apparel value chain identify relates to the lack charges import duties); and (iii) shipping costs that of workers with expertise in, for example, sewing. remain high and, for small volume shipments, com- As the sector grows, increased demand for skilled promise the feasibility of the distribution mode. Appendix D: Sectoral Mini-Deep Dives 77 FIGURE D.6 Quality Ladders for Key Export Products a. Boy’s trousers, 2015 2.5 Lithuania 2.0 Czech Republic Relative unit value 1.5 Slovenia 1.0 Georgia 0.5 0 10 20 30 40 50 60 Rank b. Cotton T-shirts, 2015 2.0 Czech Republic 1.5 Estonia Latvia Relative unit value Bosnia and Herzegovina Slovenia 1.0 Moldova Georgia 0.5 0.0 0 20 40 60 80 Rank c. Other T-shirts, 2015 2.5 Slovenia Estonia 2.0 Bosnia and Herzegovina Moldova Relative unit value Czech Republic Lithuania Georgia 1.5 1.0 0.5 0 20 40 60 80 Rank Source: World Bank Group staff calculations based on UN Comtrade. 78 Georgia: From Reformer to Performer Progress on Poverty and Shared Prosperity 79 APPENDIX E SECTORAL GDP AND EMPLOYMENT MULTIPLIERS IN GEORGIA Private investment in Georgia will generate different using a Social Accounting Matrix (SAM) multiplier impacts on the economy depending on the sector approach,17 which assumes that increases in rev- of investment. Figure E.1 shows sectoral multiplier enues, or output driven by positive shocks related to effects in Georgia on gross domestic product (GDP) investments, or business model improvements across and employment in response to an increase in sector different industry sectors, generate both direct and revenues by US$1 million. These effects are computed indirect effects throughout the economy that add up FIGURE E.1 Impact per US$1 Million of Additional Revenue Source: World Bank Group staff calculations based on data from the Global Trade Analysis Project and World Development Indicators. 80 Georgia: From Reformer to Performer to a cumulative impact. Direct effects pertain to the of investment. Induced effects have high magni- sectors directly impacted by these shocks, which will tudes across the services sector, indicating the labor- have an increase in output or revenue in response to intensive nature in these activities and a high share investment. Indirect effects arise from the backward of household spending on domestically produced and forward production links in the economy, as well food products. as consumption links that increase expenditure on High-productivity and capital-intensive manu- goods and services in response to an increase in labor facturing subsectors generally have strong backward and capital income (through expanded employment production links with other industries, but not in and capital). However, it is important to note that the Georgia. GDP multipliers in most nonfood manu- SAM multiplier approach is based on strong assump- facturing industries lag behind the agriculture and tions, including unlimited resources and supply services sectors. In these subsectors, the value-added responses in the domestic economy, fixed prices, no to output ratio is relatively small explained by the substitution effects, and a static, or unchanged struc- high share of intermediate goods in the production, ture of the economy with respect to technologies. which reduces direct effects. At the same time, while Therefore, reported results are rounded and should indirect effects are higher than in other sectors given be interpreted as an approximation that provides strong inter-industry links, they are reduced due to orders, or magnitude of expected economic impacts. a high import dependency. It is important to note Despite weak backward links, agricultural sec- that industries with strong backward links and low tors are among the industries with the highest GDP (or high) import shares in the supply chain have high multipliers driven by large direct and induced effects. (or low) sectoral GDP multipliers. However, having Figure E.1 shows that low-productivity sectors such an open economy is critical, as it promotes competi- as agriculture have high—around 1.8—GDP mul- tion and improves competitiveness of domestic firms tipliers along with services sectors. The decomposi- due to access to frontier technologies and know- tion of multipliers into direct, indirect, and induced how among other benefits. For example, imported effects helps explain these patterns. The direct effects machinery can increase competitiveness of other in these agricultural sectors have larger magnitudes sectors that use machinery as intermediate goods or compared with manufacturing sectors, due to a high capital and increase export in the economy. ratio of value added-to-output (more than 50 per- The services subsectors with high GDP multi- cent) driven by the low cost of intermediate goods pliers and the manufacturing subsectors that have relative to revenue. The agricultural sector also has substantial job creation in the past exhibit higher significant induced effects given its labor-intensive employment multipliers compared with agriculture. production structure: the labor share in value added The employment multipliers are computed using accounts for about 80 percent in most agricultural the sectoral GDP multipliers and historical employ- subsectors with an exception of forestry (31 percent) ment elasticities for three broad sectors: agriculture, and fishing (30 percent). Increased labor income of manufacturing, and services in Georgia. In particu- agricultural workers is primarily spent on food con- lar, investment in any sector would generate GDP in sumption or agricultural products, as most of the each of the above mentioned three sectors and these population of Georgia lives in rural areas with low- GDPs are multiplied by their respective employment productive subsistence farming.18 Indeed, agriculture elasticities computed using average changes in the and food products account for more than 40 percent employment to GDP ratio over the period 2011–15. of households’ total expenditure in Georgia, while In fact, job creation in response to GDP changes was the share of these sectors’ value added constitutes much higher in the manufacturing and services sec- around 20 percent of GDP. tors compared with agriculture. High GDP multipli- Among other sectors with high GDP multipli- ers combined with large number of created jobs lead ers is the services sector (with few exceptions) that to high employment multipliers in the services sec- has large direct and induced effects. Large direct and tor. Despite low GDP multipliers, the manufactur- induced effects in the services sector explain high ing sector has higher employment multipliers due to GDP multipliers as in the case of agriculture. The large job elasticities. Similarly, negligible job creation services sector has high, on average 60 percent, GDP- in agriculture compared with other sectors explains to-output ratio due to low costs of intermediates low employment multipliers. relative to revenue, which inflates the direct impact Progress on Poverty and Shared Prosperity 81 APPENDIX F KEY MACROECONOMIC INDICATORS, AT A GLANCE TABLE F.1 Impact per US$ 1 Million of Additional Revenue 2013 2014 2015 2016e 2017p 2018p 2019p National Accounts (% change, unless otherwise indicated) GDP nominal (GEL, billions) 26.8 29.2 31.8 34.0 38.0 41.3 44.6 GDP nominal (US$, billions) 16.1 16.5 14.0 14.4 15.2 15.9 16.4 Real GDP growth 3.4 4.6 2.9 2.8 4.8 4.5 4.7 Consumer price index (period average) -0.5 3.1 4.0 2.1 6.7 4.0 3.0 GDP deflator -0.8 3.8 5.9 3.2 6.6 4.0 3.0 GDP per capita (US$, thousands) 3.6 3.7 3.8 3.9 4.0 4.3 4.4 Gross investment (% of GDP) 24.8 29.8 32.1 32.7 32.4 31.8 32.2 Gross national saving (% of GDP) 19.1 19.2 20.1 19.9 23.1 22.4 22.9 Unemployment rate (%) 14.6 12.4 12.0 11.8 – – – General Government Operations (% of GDP, unless otherwise indicated)   Revenues and grants 27.5 28.0 28.1 28.4 28.8 28.7 28.6 Expenditure and net lending 30.1 31.0 31.9 32.3 32.6 32.5 32.1 Overall fiscal balance -2.6 -2.9 -3.8 -3.9 -3.8 -3.5 -3.1 Total public debt 34.7 35.6 41.4 44.9 44.8 45.5 46.0 External Sector (% of GDP, unless otherwise indicated)  Current account balance -5.8 -10.6 -12.0 -12.8 -9.3 -9.4 -9.2    Exports of goods and services 44.7 43.0 44.5 43.7 49.4 51.5 53.3    Imports of goods and services 57.6 60.6 62.3 59.3 60.2 62.6 64.8 Foreign direct investment (net) 5.1 8.1 9.0 9.3 9.2 9.0 9.1 Gross international reserves   (Months imports of goods and services) 3.4 4.0 3.0 3.9 4.1 4.2 4.4   (US$, million) 2,823 2,699 2,521 2,756 2,929 3,271 3,711 External debt (including inter-company loans) 81.8 83.0 106.6 112.3 113.1 114.6 115.1 Lari per US$ (period average) 1.66 1.77 2.27 2.37 2.51 – – Source: Georgian authorities; and World Bank and IMF staff estimates and projections. Note: GDP = gross domestic product; e = estimate; p = projection. Progress on Poverty and Shared Prosperity 83 APPENDIX G A DESCRIPTION OF THE LONG-TERM GROWTH MODEL The Long-Term Growth Model (LTGM) is an Excel capital (Kt) and effective labor (htLt). denotes total tool based on the celebrated Solow-Swan growth factor productivity, which determines the aggregate model, but adapted for growth analysis in develop- efficiency of the economy. ing countries.19 Investment, savings, and productiv- b b ity are key growth drivers, but the model includes (1) Yt = At K 1– t (htLt) other factors important for developing and emerg- ing countries, such as human capital, demograph- where b is the aggregate labor share of income and ics, and labor market participation (especially for effective labor is decomposed into human capital women). Recently, the baseline LTGM has been per worker (ht) and the number of workers (Lt). The extended to allow for an analysis of the effects of total number of workers can be written as: growth (and inequality) on poverty, based on a log-normal approximation of the income distribu- (2) Lt = ρt ~t Nt tion. Two important common results in the LTGM (both relevant for Georgia) are: First, investment-led where ρt is the participation rate, ~t is the work- growth is unsustainable in the long run, as the capital ing age to total population ratio and Nt is the total stock grows faster than output, which increases the population. capital-to-output ratio and reduces the effectiveness Physical capital next period (Kt+1) is formed by of investment for growth. Enhancing other growth undepreciated capital (1 – d)Kt and new investment drivers, such as total factor productivity, human It : capital and labor force participation, help to contain the capital-to-output ratio by boosting output, and (3) Kt+1 = (1 – d) Kt + It hence make growth more sustainable. Second, high rates of investment need to be financed by either Investment is funded by St either domestic sav- domestic or foreign savings. As foreign savings can ings or foreign savings via a current account deficit be fickle, high rates of investment in the long run (CADt): usually require high rates of domestic savings. The economy consists of a single sector that pro- (4) Yt = St /  It /  Yt + CADt /  Yt duces gross domestic product (GDP) using physical 84 Georgia: From Reformer to Performer One can further decompose changes in foreign 6). Here( x,t+1 is the growth fundamentals (equation growth savings into inbound foreign direct investment, and growth rate of factor x from t to t+1. Equation 7 is changes in total external debt (Dt): the equivalent formulation for per capita GDP gro is the equivalent formulation for per capita GDP growth, wth, , + = , + − , +1 , with the key dif- −1 / −1 ference being that population growth adds to head- (5) = + + − (1+ , )(1+ , ) line GDP growth, but subtracts from GDP per capita growth. By combining these, the model can calculate growth resulting from an investment constraint (Model 1), or a savings constraint (Model 3), or it , + ≈ , +1 + can calculate required investment to meet a growth (7) ( ℎ , +1 + , +1 + , +1 ) + target (Model 2). It also calculates changes in the 1− poverty rate, as growth in GDP per capita shifts the [ ] − (1 − )( + , +1 ) / income distribution to the right. (1– β )/(K t/Yt)is the marginal product of capi- tal (MPK), or the inverse of the marginal ICOR , + ≈ , +1 + (mICOR), which determines the effectiveness of ( ℎ, (6) +1 + , +1 + , +1 + , +1 ) + investment in boosting growth. An increase in 1− (Kt/Yt), for example from excessive investment, will [ ] − (1 − ) decrease the marginal product of capital (MPK) and / increase the MICOR. growth ( Headline GDPgrowth ( y,t+1) can be decomposed using a log-linear approximation into different Progress on Poverty and Shared Prosperity 85 APPENDIX H INVESTMENT CLIMATE DEFICIENCIES • Land markets: In 2017 Doing Business, Georgia contract and transfer and convertibility restric- is ranked 3rd on “ease of registering property” tions. The new investment law, which is being and 8th on “acquiring construction permits”. developed, will include provisions to strengthen However, only a small proportion of land is reg- investor guarantees and protections21 in line istered and existing registries are outdated. Thus, with international standards. Georgia’s Business access to land is limited de facto, which creates Ombudsman’s Office will need to be strengthened major barriers for firms, inhibits access to finance to better implement investor protections and in rural areas, and the ability of local government manage critical investor grievances. to raise revenues. • Corporate governance. Corporate governance • Framework for firm exit and restructuring: challenges include inadequate corporate trans- Georgia ranks 106th on “resolving insolvency”. parency related to information disclosure about In Georgia, insolvency is defined as the inability financials and ownership structure, inefficient of the debtor to pay its debts as they come due.20 corporate boards and weak protection of minor- Therefore, it is possible that a viable business with ity shareholders (see figure H.1). While the corpo- cash flow problems may be pronounced insolvent rate governance related provisions are stipulated and forced into bankruptcy. Incentives are missing in the legislation, they only apply to publicly for the financial intermediaries to provide postpe- traded companies, which are few in Georgia. A tition financing. It is difficult for a creditor to ini- voluntary corporate governance code for banks is tiate insolvency proceedings, which dampens the in place, but not widely followed. There is no cor- confidence that creditors have in loan recovery. porate governance code for real sector companies. There are other issues related to management and Recently, the government has made important disposal of assets, the priority rights of the credi- amendments in the legislation, such as barring tors, and restructuring proceedings. appointments of executives as Board Chairman or • Investor protection: The Global Competitiveness member of audit committee of the Board. These Index ranks Georgia 20th on “strength of investor will help to increase the independence of corpo- protection”. However, in overall property rights rate boards and enhance the protection of minor- protection is ranked 54th. Investors are facing ity shareholders. However, these efforts remain risks related to regulatory uncertainty, adverse fragmented and insufficient. and/or frequent regulatory changes, breach of 86 Georgia: From Reformer to Performer FIGURE H.1 Global Competitiveness Index Corporate governance rank, 2016 Protection of minority Efficacy of Strength of auditing Strength of invest Rank shareholders corporate boards and reporting standards or protection 20 Georgia 25 30 35 40 45 Armenia 50 Estonia 55 60 65 70 Armenia 75 80 85 Estonia 90 95 100 105 Georgia 110 Source: World Economic Forum. Progress on Poverty and Shared Prosperity 87 APPENDIX I GEORGIA PRODUCT SPACE OF COMPETITIVELY EXPORTED PRODUCTS FIGURE I.1 Georgia Product Space of Competitively Exported Products, 2000 and 2015 a. 2000 Animal Vegetables Foodstuffs Minerals Chemicals Plastics Hides Apparel Footwear Wood Stone Metals b. 2015 Machinery Auto Source: Atlas of economic complexity, http://atlas.cid.harvard.edu. Note: The size of the bubble is proportional to the share in total exports 88 Georgia: From Reformer to Performer Notes References 1. MOA (2014). GNTA (Georgian National Tourism Administration). 2. The average area of land operated by farms is 1.4 2017. "Georgia Tourism Strategy, 2015-2025." Tbilisi. hectares, with majority of them operating plots of less than World Bank. 2016. "Georgia Power Sector Policy Note." 1 hectare. Washington, D.C. 3. The first phase (1992–98) of land privatization Hevia and Loayza (2012) transferred 60 percent of arable land to about 1 million Information Centre, Information and Analytical households, and the second phase (2005 onwards) and the Department, Ministry of Internal Affairs of Georgia, Agro100 program (2007) privatized larger plots over 50 2017. hectares. Kinkladze, Rusudan. 2015. “Modern Trends and Prospects 4. Arezki, Deininger, and Selod (2012). to Develop the Agrarian Sector of Georgia.” Social and 5. A subsidiary of the major global organic baby food Behavioral Sciences 213 (2015): 562–568. https://doi. group (HiPP), which entered Georgia’s apple processing org/10.1016/j.sbspro.2015.11.450. market in 2006, exited in 2014 as the company was not able Kuriakose, Smita. 2013. Fostering Entrepreneurship to source enough raw material. in Ge org ia. Washington, D.C.: Wor ld 6. Mechanizatori LLC Rapid Assessment Report, IFC Bank. http://documents.worldbank. Public-Private Partnership Transaction Advisory, 2015. org/curated/en/281821468244168985/ 7. A 6-to-10-day forecast costs GEL 30, a sector-specific Fostering-entrepreneurship-in-Georgia. 24-hour updates are GEL 500. Livny, Eric and Andrei Maximov. 2017. Identifying 8. Georgian National Tourism Administration and Sectoral Priorities in Georgian Agriculture, ISET Policy National Statistics Agency (2017). Institute, May 2017. Tbilisi. 9. According to the World Travel and Tourism Council Mechanizatori LLC Rapid Assessment Report, IFC Public- (2015), the indirect contribution is measured by the GDP Private Partnership Transaction Advisory, 2015. and jobs supported by the spending of those who directly MOA (Georgian Ministry of Agriculture). 2014. Strategy and indirectly employed by the travel and tourism sector. for Agricultural Development in Georgia, 2015–2020. 10. Georgian Ministry of Internal Affairs (2017). Tbilisi: MOA. 11. GNTA (2017) OECD (Organisation for Economic Co-operation and 12. IBRD (2016). Development) 2016. PISA 2015 Results: Excellence and 13. IBRD (2016). Equity in Education. Paris: OECD. 14. Estimated at conservative price of US$0.6 per OECD/IEA (Organisation for Economic Co-operation kilowatt hour. and Development/International Energy Agency). 2016. 15. It would be interesting to look at the role of Energy and Air Pollution. World Energy Outlook, Georgia’s tourism sector in global value chains. However, Special Report. Paris: OECD/IEA. data availability constrained that analysis. Pennings, Steven. 2017. The Long Term Growth Model. 16. Firms also mentioned that in cut-make-trim Washington, D.C.: World Bank. http://www.worldbank. segments, where margins are tight, exchange rate volatility org/en/research/brief/LTGM. appears to be an obstacle. Rabah Arezki, Klaus Deininger, and Harris Selod. 2012. 17. The main database for this model is the “Global Land Rush.” Finance and Development 49 (1). Global Trade Analysis Project version 9 https://www. UNECE (United Nations Economic Commission for gtap.agecon.purdue.edu/databases/v9/ for estimat- Europe). 2016. Environmental Performance Reviews, ing the employment multiplier, employment, and GDP Georgia, Third Review. Geneva: UNECE. database is taken from the World Bank’s WDI data- WEF (World Economic Forum). 2016. The Global base: http://databank.worldbank.org/data/reports. Competitiveness Report 2016–2017, edited by Klaus aspx?source=world-development-indicators. Schwab. Geneva: WEF. 18. Kinkladze (2015). World Bank. 2016a. 2016 Doing Business Report . 19. See Pennings (2017) for a detailed model Washington, D.C.: World Bank. description. Further information about the tool is avail- World Bank. 2016b. Georgia Power Sector Policy Note. able from the authors, or on the MFM online tools intranet Washington, D.C.: World Bank. site. The LTGM builds on earlier work by Hevia and Loayza World Travel and Tourism Council, 2015. (2012). 20. Kuriakose (2013). 21. That is, guarantees of nondiscrimination, pro- tection against expropriation, access to international dis- pute resolution mechanisms, and so on. Progress on Poverty and Shared Prosperity 89 BIBLIOGRAPHY Agriculture and Water ––––. 2015. “Public Expenditure Review, Selected Fiscal Ecorys and CASE (Center for Social and Economic Issues.” Washington, DC. Research). 2012. “Trade Sustainability Impact Assessment in support of negotiations of a DCFTA between the EU and Georgia and the Republic of Education Moldova.” Technical Report submitted to the European Rutkowski, 2013. “World Bank Employer STEP Survey Commission, Directorate-General Trade, Ecorys, 2012.” World Bank, Washington, D.C. http://microdata. Rotterdam and CASE, Warsaw. http://trade.ec.europa. worldbank.org/index.php/catalog/2565 eu/doclib/docs/2012/november/tradoc_150105.pdf. World Bank. 2014. “Back to Work.” Washington, D.C. FAO (Food and Agriculture Organization of the United Nations). 2012. Assessment of Agricultural and Rural Development Sectors in the Eastern Partnership Energy, Extractives and ICT Countries. Rome: FAO. http://www.fao.org/docrep/ field/009/aq676e/aq676e.pdf. Merle-Beral, Elena. 2015. “Hydropower Development Geostat. 2015. “Preliminary Results of 2014 General Process in Georgia.” IFC Working Paper. Population Census of Georgia.” Geostat, Tbilisi. http:// World Bank. 2014. ICT in Georgia: Strategic Considerations www.geostat.ge/index.php?action=news&npid=864&la to Support Innovation and Employment. ng=eng. ––––. 2015. Georgia New Economy Skills Development. USAID (United States Agency for International ––––. 2015. The Global Opportunity in Online Development). 2009. “Georgia Agricultural Outsourcing. http://www.ictforjobs.org/static/app/pdf/ Assessment.” USAID, Washington, DC. Report.pdf ––––. 2011. “Georgia – Economic Prosperity Initiative: ––––. 2015. “Georgia Regional Power Trade, South Agricultural Policy Environment Assessment.” USAID, Caucasus, Regulatory, Market and Technical Washington, DC. Assessment.” May. Von Cramon-Traubabel, Stephan. 2014. “Georgia’s ––––. 2015. Ten-Year Network Development Plan of Agricultural Exports.” Policy Paper Series 2014-02, Georgia for 2016-2026, GSE, ISET Policy Institute, Tbilisi. ––––. 2016. Entrepreneurship in Georgia. World Bank. 2009. Agriculture and Rural Enterprise ––––. 2016. Georgia Regional Power Trade - South Development. Washington, DC. Caucasus Regulatory, Market and Technical Assessment. ––––. 2012. “Rural Investment Climate Assessment.” Opportunities and Challenges. Washington, DC. ––––. 2016. “Georgia Power Sector Policy Note.” ––––. 2012. “Kakheti Regional Development Study.” ––––. 2016. “Large Hydro Plan under the Least Cost Plan, Washington, DC. Power Sector Policy Note.” 90 Georgia: From Reformer to Performer Qiang, Christine Zhen-Wei, and Carlo M. Rossotto. 2009. Poverty “Economic Impacts of Broadband.” In Information and 16 Information and Communications for Cancho, C., M. Davalos, and C. Sanchez-Paramo. 2015. Development 2009 Communications for Development “Why So Gloomy? Perceptions of Economic Mobility 2009: Extending Reach and Increasing Impact, 35–50. in Europe and Central Asia.” Policy Research Working Washington, DC: World Bank. Paper 7519, World Bank Group, Washington, DC. Badran, Farid. 2011. Impact of Broadband on Economic Cancho, Cesar and Elena Bondarenk. 2017. “The Growth in Emerging Countries. Distributional Consequences of Fiscal Policy in PricewaterhouseCoopers. 2011. ICT Sector: Invest in Georgia.” The Distributional Consequences of Fiscal Georgia … Explore Strong Market Growth Prospect. Policy: In Evidence from Eight Low- and Middle- http://ukrexport.gov.ua/i/imgsupload/file/ICT_Sector_ Income Countries, edited by Gabriela Inchauste and Study.pdf Nora Lustig, 113–147. Washington, D.C.: World Bank. https://openknowledge.worldbank.org/bit- s t re a m / h a n d l e / 1 0 9 8 6 / 2 7 9 8 0 / 9 7 8 1 4 6 4 8 1 0 9 1 6 . Finance and Markets pdf?sequence=2&isAllowed=y. EBRD (European Bank for Reconstruction and International Monetary Fund and World Bank. 2014. Development). 2017. Transition Report 2016-17 - Financial Sector Assessment Program. Washington, Transition for All: Equal Opportunities in an Unequal D.C. World. London: EBRD. –––––. 2014. “Georgia FSAP Update, FY2015.” Washington, D.C. –––––. 2014. Fostering Entrepreneurship in Georgia . Social Protection and Labor Washington, D.C. –––––. 2014. “Georgia SME Financial Access Supply Fernandes-Alcantara, Adrienne L. 2012. Youth and the Assessment.” Technical Note. Washington, D.C. Labor Force: Backgrounds and Trends. Washington, –––––. 2014. MSME Financial Access Demand Survey, DC: Congressional Research Service. http://digi- 2015-2016. Report. Washington, D.C. t a l co m m o n s . i l r. co r n e l l . e d u / c g i / v i e wco n te n t . –––––. 2014. “Retail Payments Incentives Report.” cgi?article=1922&context=key_workplace Washington, D.C. Sondergaard, Lars, Mamta Murthi, Dina Abu-Ghaida, Christian Bodewig, and Jan Rutkowski. 2012. Skills, Not Just Diplomas: Managing Education for Results in Governance and Procurement Eastern Europe and Central Asia. Washington, D.C.: World Bank. Rodrik, D. and R. Rigabon. 2004. “Rule of Law, United Nations. 2015. “World Population Prospects: 2015 Democracy, Openness and Income: Estimating the Revision, Key Finding and Advance Tables.” Working Interrelationship.” NBER Working Paper Series. Paper ESA/P/WP.241, Department of Economic and World Bank. 2012. Fighting Corruption in Public Services: Social Affairs, Population Division, New York. Chronicling Georgia’s Reforms. World Bank. 2011. Georgia Demographic Change: Georgia Public Expenditure and Financial Accountability. Implications for Social Programs and Poverty . Washington, D.C. ––––. 2014. SABER Teachers Georgia Country Report Health, Nutrition and Population 2014. Washington, D.C. World Bank. 2012. Georgia Public Expenditure Review ––––. 2014. SABER Workforce Development Georgia 2012. Country Report 2014. Washington, D.C. ––––. 2017. Georgia Public Expenditure Review 2017. ––––. 2015. Promoting Labor Market Participation and Social Inclusion in Europe and Central Asia’s Poorest Countries. Washington, D.C. Marco Fiscal ––––. Forthcoming. Georgia, Jobs Diagnostic. Washington, D.C.: World Bank. World Bank. 2012. “Georgia Programmatic Public Expenditure Review” ––––. 2013. Georgia Rising: Sustaining Rapid Economic Social and Gender Growth ––––. 2014. “Georgia Programmatic Public Expenditure Teignier, Marc and David Cuberes. 2014. “Aggregate Review” Costs of Gender Gaps in the Labor Market: A ––––. 2014. Georgia: Seizing the Opportunity to Prosper. Quantitative Estimate.” Universitat de Barcelona ––––. 2015. “Georgia Programmatic Public Expenditure Review: Selected Fiscal Issues” Economics Working Papers 2014/308. ––––. 2017. “Georgia Programmatic Public Expenditure Review” Appendix I: Bibliography 91 Spatial - Urban/Rural + Spatial Mobility Green Alternative. 2016. “Monitoring Report on Implementation of Environmental Commitments Georgian, State Commission on Migration Issues. 2015 under Georgia EU Association Agenda 2014-2016.” Migration Profile of Georgia. Tbilisi. http://migra- Green Alternative, Tbilisi. http://greenalt.org/wp-con- tion.commission.ge/files/migration_profile_of_geor- tent/uploads/2016/09/Monitoring-_report__2016_ gia_2015.pdf. september_eng.pdf. Government of Georgia. 2017. “Rural Development IEA (International Energy Agency). 2015. Eastern Europe, Strategy of Georgia, 2017-2020” Tbilisi. http:// Caucasus and Central Asia: Energy Policies Beyond IEA enpard.ge/en/wp-content/uploads/2015/05/Rural- Countries. Paris: IEA. Development-Strategy-of-Georgia-2017-2020.pdf. UNECE (United Nations Economic Commission for World Bank. 2013. Georgia Urbanization Review: Toward Europe). 2016. Environmental Performance Reviews, an Urban Sector Strategy. Washington D.C.: World Bank Georgia, Third Review. Geneva: UNECE. https://www. Group. unece.org/fileadmin/DAM/env/epr/epr_studies/ECE_ ––––. 2016. Georgia Country Gender Assessment. CEP_177.pdf. Washington, D.C. World Bank. 2014. Georgia Country Environmental Assessment. Washington, DC. ––––. 2016. Europe and Central Asia: Country Risk Profiles. Washington, D.C. Trade and Competitiveness and IFC ––––. Forthcoming. Georgia Disaster Risk Finance and Bruhn, Miriam and Loeprick, Jan, 2014. “Small Business Insurance Diagnostic Note. Washington D.C.: World Tax Policy, Informality, and Tax Evasion -- Evidence Bank Group. from Georgia.” Policy Research Working Paper ––––. Forthcoming. Recommendations for the Eurocode Series 7010, World Bank. 8 – Georgia National Annex on Seismic Design of ––––. 2011. “Judicial Decisions Assessment.” London. Structures. Washington D.C.: World Bank Group. ––––. 2013. “Commercial Laws of Georgia: An Assessment by the EBRD.” Geneva. ––––. 2013. “Enforcement Agents Assessment.” Geneva. European Bank for Reconstruction and Development (EBRD), World Bank Group (WBG), and European Investment Bank (EIB). Business Environment and Enterprise Performance Survey. World Bank. 2013. Georgia Trade Competitiveness Diagnostic, ––––. 2014. Georgia 2020 Innovation Strategy. Washington, D.C. ––––. 2016. Doing Business Report 2017: Equal Opportunity for All. Washington, D.C. Transport ––––. 2017. Georgia Road Sector Financing and Institutional Strategy. Washington, DC. Environment, Climate Change and DRM Arabidze, Margalita. 2016. “Georgia - First National Energy Efficiency Action Plan, Ministry of Energy of Georgia.” Presentation presented at the “10th Energy Efficiency Coordination Group Meeting,” in Vienna, March 10. file:///Users/johnibay/Downloads/EECG032016_ Ministry%20of%20Energy.pdf. Chikviladze, K. 2007. National Data/Information Infrastructure in Georgia. Georgian Ministry of Environmental Protection, Tbilisi. Georgian Ministry of Energy. 2015. Energy Policy of Georgia. Draft paper. Tbilisi Progress on Poverty and Shared Prosperity 99 BIBLIOGRAPHY Agriculture and Water Georgia Regional Power Trade, South Caucasus, EU (2012a), Assessment of Agricultural and Rural Regulatory, Market and Technical Assessment, May Development Sectors in the Eastern Partnership 2015, IFC Countries Georgia Regional Power Trade - South Caucasus EU (2012b) Trade Sustainability Impact Assessment in Regulatory, Market and Technical Assessment. support of negotiations of a DCFTA between the EU Opportunities and Challenges, WBG, May 2016 and Georgia and the Republic of Moldova Georgia Power Sector Policy Note, World Bank, June 2016 Geostat 2014 - Preliminary Results of 2014 General Hydropower development process in Georgia, Elena Population Census of Georgia. Merle-Beral, IFC working paper, 2015. Von Cramon (2014) – Georgia’s Agricultural Exports, Ten-Year Network Development Plan of Georgia for 2016- Professor Stephan von Crammon-Traubabel, German 2026, GSE, December 2015. Economic Team, Georgia. Ministry of Energy of Georgia. Website accessed on 3-9 USAID (2009) Georgia Agricultural Assessment January 2017 USAID (2011) Georgia Agricultural Policy Environment BTOR Mission to Tbilisi on December 12-14, 2016. Elena Assessment Merle-Beral, IFC World Bank (2009) - Agriculture and Rural Enterprise New Possibilities for developing RE in Georgia. Hard Talk Development organized by REN21 and UNECE, December 201 World Bank (2012a) – Rural Investment Climate Qiang & Rossotto 2009, IC4D Report, The World Bank, Assessment 2009 World Bank (2012b) Kakheti Regional Development Study Farid Badran (2011) Impact of broadband on economic World Bank (2015) – Public Expenditure Review, Selected growth in emerging countries Fiscal Issues Katz (2009) Rural Development Strategy of Georgia, 2017-2020 Q3 2016 State of the Internet/Connectivity Report, Akamai Hausmann, Hwang and Rodrik (2006) Education ICT in Georgia: Strategic considerations to support inno- Rutkowski, 2013. World Bank Employer STEP survey 2012 vation and employment. The World Bank. March 2014 Hanushek & Rivkin, 2010 PWC, 2011, http://ukrexport.gov.ua/i/imgsupload/file/ Hanushek, 2011 ICT_Sector_Study.pdf Rivkin, Hanushek & Kain, 2005 Entrepreneurship in Georgia, 2016 World Bank 2014: Back to Work World Bank, Georgia New Economy Skills Development, June 2015 Energy, Extractives, and ICT The Global Opportunity in Online Outsourcing, World Large hydro plan under the least cost plan, Power Sector Bank, June 2015, http://www.ictforjobs.org/static/app/ Policy Note, 2016 pdf/Report.pdf 100 Georgia: From Reformer to Performer Finance and Markets Social Protection and Labor Financial Sector Assessment Program, 2014, IMF and World Bank (2015). “Promoting Labor Market World Bank Participation and Social Inclusion in Europe and Fostering Entrepreneurship in Georgia, 2014 (Report) Central Asia’s Poorest Countries”. Social Protection and Retail payments incentives report, 2014 (P130433) Labor Global Practice. Georgia SME Financial Access Supply Assessment, 2014 World Bank 2011: Georgia Demographic Change: (Technical Note) Implications for social programs and poverty Georgia FSAP Update joint WB-IMF Report of May 2014, World Population Prospects: 2015 Revisions (UN FY2015 Department of Economic and Social Affairs) MSME Financial Access Demand Survey, 2015-2016 Fernandes-Alcantara, 2012: Youth and the Labor (Report) Force: Backgrounds and Trends. http://digi- Financial sector monitoring and crisis preparedness assess- t a l co m m o n s . i l r. co r n e l l . e d u / c g i / v i e wco n te n t . ment (regular) cgi?article=1922&context=key_workplace Bank resolution assessment report, October 2016 SABER country report 2014 (P155869), FY2017 World Bank 2012: Skills, not just diplomas Handel et al. 2016 Governance and Procurement World Bank (forthcoming) Georgia, Jobs Diagnostic Rodrik, D. and R. Rigabon, Rule of Law, Democracy, Openness and Income: Estimating the Interrelationship, Social and Gender NBER Working paper Series, 2004 Teignier, M., and Cuberes, D. (2014). “Aggregate Costs h t t p : / / w w w. p r o c u r e m e n t . g o v. g e / E L i b r a r y / of Gender Gaps in the Labor Market: A Quantitative StrategyActionPlan.aspx Estimate.” UB Economics Working Papers 2014/308 Fighting Corruption in Public Services: Chronicling World Bank (2016) Georgia Country Gender Assessment Georgia’s Reforms, The World Bank, 2012 Georgia Public Expenditure and Financial Accountability, Spatial - Urban/Rural + Spatial Mobility 2012 “Rural Development Strategy of Georgia, 2017-2020” Health, Nutrition and Population “2015 Migration Profile of Georgia”, State Commission on Georgia Public Expenditure Review 2012 Migration Issues Georgia Georgia Public Expenditure Review 2017 World Bank. 2013. Georgia Urbanization Review: Toward an Urban Sector Strategy. Washington D.C.: World Marco Fiscal Bank Group. This report analyzes the profile, trends World Bank (2012). “Georgia Programmatic Public and challenges of Georgia’s changing urban landscape Expenditure Review” since independence in 1991 and provides policy sugges- World Bank (2014). “Georgia Programmatic Public tions to facilitate the economic transition of the coun- Expenditure Review” try through its cities. World Bank (2015). “Georgia Programmatic Public Expenditure Review: Selected Fiscal Issues” Trade and Competitiveness and IFC World Bank (2017). “Georgia Programmatic Public Assessment of Commercial Laws of Georgia, EBRD, 2013 Expenditure Review” Business Environment and Enterprise Performance Survey, Georgia Rising: Sustaining Rapid Economic Growth, The World Bank Group, 2013 World Bank, 2013 Doing Business Report 2017, World Bank Group Georgia: Seizing the Opportunity to Prosper, The World Enforcement Agents Assessment, EBRD, 2013 Bank, 2014 Fostering Entrepreneurship in Georgia, World Bank, 2013 Various biannual economic reports Global Competitiveness Report 2016-2017, World Economic Forum Poverty Georgia Trade Competitiveness Diagnostic, World Bank, Cancho, C., M. Davalos & C. Sanchez-Paramo (2015). June 2013 “Why So Gloomy? Perceptions of Economic Mobility in Judicial Decisions Assessment, EBRD, 2011 Europe and Central Asia”, World Bank Policy Research Rating agencies reports, Moody’s, S&P and Fitch Working Paper 7519, World Bank Group. Georgia Trade Competitiveness Diagnostics, The World Cancho, C., & E. Bondarenko (2017)). “The Distributional Bank, 2013 Consequences of Fiscal Policy in Georgia” mimeo Georgia 2020 Innovation Strategy, The World Bank, 2014 European Union (2017). “Transition for All: Equal Opportunities in an Unequal World”. Appendix I: Bibliography 101 Transport World Bank. 2016. Europe and Central Asia: Country Georgia Road Sector Financing and Institutional Strategy, Risk Profiles. Washington D.C.: World Bank Group. World Bank, January 2017 This report includes a risk profile for Armenia which Georgia’s Transport and Logistics Strategy: Achievements is based on a quantitative risk assessment derived from to date and areas for improvements, World Bank, global flood and earthquake models. The profile pro- January 2015 vides estimations in terms of fatalities, affected popula- tion, affected GDP, and capital loss. Environment, Climate Change and DRM World Bank. Forthcoming. Georgia Disaster Risk Finance International Energy Agency (IEA): Eastern Europe, and Insurance Diagnostic Note. Washington D.C.: Caucasus and Central Asia. Energy Policies Beyond IEA World Bank Group. This report will (i) analyze existing countries. risk financing and budgetary process in the aftermath Energy Policy of Georgia, draft paper (GoG), 2015 of a disaster; (ii) determine current levels of postdisas- Georgia-First National Energy Efficiency Action Plan, ter financing and the government’s explicit and implicit Ministry of Energy of Georgia. contingent liabilities to natural disasters; and (iii) set Monitoring Report on Implementation of Environmental out policy options to improve the system of postdisas- Commitments under Georgia EU Association Agenda ter financing. 2014-2016 World Bank. Forthcoming. Recommendations for the Energy and Air Pollution. World Energy Outlook, Special Eurocode 8 – Georgia National Annex on Seismic Report; 2016, OECD/IEA Design of Structures. Washington D.C.: World Bank National Data/Information Infrastructure in Georgia; Group. The report will provide recommendations 2007, Chikviladze, K. to guide the development of the National Annex on Environmental Performance Reviews, Georgia, Third Seismic Design of Structures which is being led by the Review; 2016, UNECE Ministry of Economy and Sustainable Development. Georgia Country Environmental Assessment, 2014, The World Bank Progress on Poverty and Shared Prosperity 103 BIBLIOGRAPHY Agriculture and Water Georgia Regional Power Trade - South Caucasus EU (2012 a), Assessment of Agricultural and Rural Regulatory, Market and Technical Assessment. Development Sectors in the Eastern Partnership Opportunities and Challenges, WBG, May 2016 Countries Georgia Power Sector Policy Note, World Bank, June 2016 EU (2012b) Trade Sustainability Impact Assessment in Hydropower development process in Georgia, Elena support of negotiations of a DCFTA between the EU Merle-Beral, IFC working paper, 2015. and Georgia and the Republic of Moldova Ten-Year Network Development Plan of Georgia for 2016- Geostat 2014 - Preliminary Results of 2014 General 2026, GSE, December 2015. Population Census of Georgia. Ministry of Energy of Georgia. Website accessed on 3-9 Von Cramon (2014) – Georgia’s Agricultural Exports, January 2017 Professor Stephan von Crammon-Traubabel, German BTOR Mission to Tbilisi on December 12-14, 2016. Elena Economic Team, Georgia. Merle-Beral, IFC USAID (2009) Georgia Agricultural Assessment New Possibilities for developing RE in Georgia. Hard Talk USAID (2011) Georgia Agricultural Policy Environment organized by REN21 and UNECE, December 201 Assessment Qiang & Rossotto 2009, IC4D Report, The World Bank, World Bank (2009) - Agriculture and Rural Enterprise 2009 Development Farid Badran (2011) Impact of broadband on economic World Bank (2012a) – Rural Investment Climate growth in emerging countries Assessment Katz (2009) World Bank (2012b) Kakheti Regional Development Study Q3 2016 State of the Internet/Connectivity Report, Akamai World Bank (2015) – Public Expenditure Review, Selected Hausmann, Hwang and Rodrik (2006) Fiscal Issues ICT in Georgia: Strategic considerations to support inno- Rural Development Strategy of Georgia, 2017-2020 vation and employment. The World Bank. March 2014 Education PWC, 2011, http://ukrexport.gov.ua/i/imgsupload/file/ Rutkowski, 2013. World Bank Employer STEP survey 2012 ICT_Sector_Study.pdf Hanushek & Rivkin, 2010 Entrepreneurship in Georgia, 2016 Hanushek, 2011 World Bank, Georgia New Economy Skills Development, Rivkin, Hanushek & Kain, 2005 June 2015 World Bank 2014: Back to Work The Global Opportunity in Online Outsourcing, World Energy, Extractives and ICT Bank, June 2015, http://www.ictforjobs.org/static/app/ Large hydro plan under the least cost plan, Power Sector pdf/Report.pdf Policy Note, 2016 Finance and Markets Georgia Regional Power Trade, South Caucasus, Regulatory, Financial Sector Assessment Program, 2014, IMF and Market and Technical Assessment, May 2015, IFC World Bank Fostering Entrepreneurship in Georgia, 2014 (Report) Retail payments incentives report, 2014 (P130433) 104 Georgia: From Reformer to Performer Georgia SME Financial Access Supply Assessment, 2014 World Bank 2012: Skills, not just diplomas (Technical Note) Handel et al. 2016 Georgia FSAP Update joint WB-IMF Report of May 2014, World Bank (forthcoming) Georgia, Jobs Diagnostic FY2015 Social and Gender MSME Financial Access Demand Survey, 2015-2016 Teignier, M., and Cuberes, D. (2014). “Aggregate Costs (Report) of Gender Gaps in the Labor Market: A Quantitative Financial sector monitoring and crisis preparedness assess- Estimate.” UB Economics Working Papers 2014/308 ment (regular) World Bank (2016) Georgia Country Gender Assessment Bank resolution assessment report, October 2016 Spatial - Urban/Rural + Spatial Mobility (P155869), FY2017 “Rural Development Strategy of Georgia, 2017-2020” Governance and Procurement “2015 Migration Profile of Georgia”, State Commission on Rodrik, D. and R. Rigabon, Rule of Law, Democracy, Migration Issues Georgia Openness and Income: Estimating the Interrelationship, World Bank. 2013. Georgia Urbanization Review: Toward NBER Working paper Series, 2004 an Urban Sector Strategy. Washington D.C.: World h t t p : / / w w w. p r o c u r e m e n t . g o v. g e / E L i b r a r y / Bank Group. This report analyzes the profile, trends StrategyActionPlan.aspx and challenges of Georgia’s changing urban landscape Fighting Corruption in Public Services: Chronicling since independence in 1991 and provides policy sugges- Georgia’s Reforms, The World Bank, 2012 tions to facilitate the economic transition of the coun- Georgia Public Expenditure and Financial Accountability, try through its cities. 2012 Trade and Competitiveness and IFC Health, Nutrition and Population Assessment of Commercial Laws of Georgia, EBRD, 2013 Georgia Public Expenditure Review 2012 Business Environment and Enterprise Performance Survey, Georgia Public Expenditure Review 2017 World Bank Group, 2013 Marco Fiscal Doing Business Report 2017, World Bank Group World Bank (2012). “Georgia Programmatic Public Enforcement Agents Assessment, EBRD, 2013 Expenditure Review” Fostering Entrepreneurship in Georgia, World Bank, 2013 World Bank (2014). “Georgia Programmatic Public Global Competitiveness Report 2016-2017, World Expenditure Review” Economic Forum World Bank (2015). “Georgia Programmatic Public Georgia Trade Competitiveness Diagnostic, World Bank, Expenditure Review: Selected Fiscal Issues” June 2013 World Bank (2017). “Georgia Programmatic Public Judicial Decisions Assessment, EBRD, 2011 Expenditure Review” Rating agencies reports, Moody’s, S&P and Fitch Georgia Rising: Sustaining Rapid Economic Growth, The Georgia Trade Competitiveness Diagnostics, The World World Bank, 2013 Bank, 2013 Georgia: Seizing the Opportunity to Prosper, The World Georgia 2020 Innovation Strategy, The World Bank, 2014 Bank, 2014 Various biannual economic reports Transport Poverty Georgia Road Sector Financing and Institutional Strategy, Cancho, C., M. Davalos & C. Sanchez-Paramo (2015). World Bank, January 2017 “Why So Gloomy? Perceptions of Economic Mobility in Georgia’s Transport and Logistics Strategy: Achievements Europe and Central Asia”, World Bank Policy Research to date and areas for improvements, World Bank, Working Paper 7519, World Bank Group. January 2015 Cancho, C., & E. Bondarenko (2017)). “The Distributional Environment, Climate Change and DRM Consequences of Fiscal Policy in Georgia” mimeo International Energy Agency (IEA): Eastern Europe, European Union (2017). “Transition for All: Equal Caucasus and Central Asia. Energy Policies Beyond IEA Opportunities in an Unequal World”. countries. Social Protection and Labor Energy Policy of Georgia, draft paper (GoG), 2015 World Bank (2015). “Promoting Labor Market Georgia-First National Energy Efficiency Action Plan, Participation and Social Inclusion in Europe and Ministry of Energy of Georgia. Central Asia’s Poorest Countries”. Social Protection and Monitoring Report on Implementation of Environmental Labor Global Practice. Commitments under Georgia EU Association Agenda World Bank 2011: Georgia Demographic Change: 2014-2016 Implications for social programs and poverty Energy and Air Pollution. World Energy Outlook, Special World Population Prospects: 2015 Revisions (UN Report; 2016, OECD/IEA Department of Economic and Social Affairs) National Data/Information Infrastructure in Georgia; Fernandes-Alcantara, 2012: Youth and the Labor 2007, Chikviladze, K. Force: Backgrounds and Trends. http://digi- Environmental Performance Reviews, Georgia, Third t a l co m m o n s . i l r. co r n e l l . e d u / c g i / v i e wco n te n t . Review; 2016, UNECE cgi?article=1922&context=key_workplace Georgia Country Environmental Assessment, 2014, The SABER country report 2014 World Bank Bibliography 105 World Bank. 2016. Europe and Central Asia: Country Risk Profiles. Washington D.C.: World Bank Group. This report includes a risk profile for Armenia which is based on a quantitative risk assessment derived from global flood and earthquake models. The profile pro- vides estimations in terms of fatalities, affected popula- tion, affected GDP, and capital loss. World Bank. Forthcoming. Georgia Disaster Risk Finance and Insurance Diagnostic Note. Washington D.C.: World Bank Group. This report will (i) analyze existing risk financing and budgetary process in the aftermath of a disaster; (ii) determine current levels of postdisas- ter financing and the government’s explicit and implicit contingent liabilities to natural disasters; and (iii) set out policy options to improve the system of postdisas- ter financing. World Bank. Forthcoming. Recommendations for the Eurocode 8 – Georgia National Annex on Seismic Design of Structures. Washington D.C.: World Bank Group. The report will provide recommendations to guide the development of the National Annex on Seismic Design of Structures which is being led by the Ministry of Economy and Sustainable Development.