On May 20th, in the Ceremonial Palace of Georgia, the Managing Director of International Monetary Fund Christine Lagarde met with the students of leading universities in Georgia.
Christine Lagarde discussed “Inclusive Growth” with the students. She positively assessed the implemented reforms in the financial sector and answered the questions from the students.
I would like to thank Governor Gvenetadze for the kind introduction and thank the people of Georgia for their incredible warmth and hospitality. I am truly honored to be here with you today.
- Introduction and Theme
When I walked into this hall this morning, I was struck by the magnificent view of Old Town Tbilisi—which has become a top destination for visitors from across the globe.
Many of them, like myself, are drawn to those streets that have been shaped by a unique combination of traditions, cultures, and commerce at the crossroads between east and west.
If you take a short walk—as I plan on doing during my visit—you will see Christian churches of various denominations, a mosque, a synagogue, and many other buildings that—together—symbolize some of the key ingredients of Georgia’s success: tolerance, openness, and the ability to learn from the past.
Indeed, after regaining independence in 1991, Georgia went through an exceptionally challenging period, including a sharp drop in living standards and a collapsing manufacturing sector. These painful economic scars marked the beginning of a new chapter.
Over the past generation, Georgia has written a remarkable story of transformation—by shifting the economy from a heavy reliance on agriculture towards service industries, lifting average incomes, boosting tourism and trade, and creating one of the world’s most welcoming business environments.
This transformation has been driven by hard work and a firm commitment to economic reforms and openness. At the same time, we know that greater openness increases one’s sensitivity to shifting global trends and economic shocks from abroad—think of the impact of the global financial crisis in 2008.
That is why Georgia is implementing an ambitious set of new reforms—a home-grown program to boost economic resilience, jobs, and living standards. This program is designed to address the specific needs of the Georgian economy, and of the Georgian people.
The longer-term goal is to catch up to living standards in Europe—to unlock the full potential of Georgians, young and old, rich and poor, here in Tbilisi and across the country.
So once again, Georgia is writing a story of transformation—and not just in economics.
Here I am thinking of Georgia’s unique wine-making tradition, which—as you know—started about 8,000 years ago. How do you create a unique vintage year after year? How do you create something that is both uniquely Georgian and appreciated by people around the world? A big part of the answer lies in resilience and creativity.
These ingredients can help turn grapes into wine; they can also help transform the economy. First, resilience. How can Georgia strengthen itself to withstand the economic headwinds it will face in the months ahead? And second, creativity. What new ingredients are needed for Georgia to build a more inclusive and sustainable economy over the long-term? This is what I would like to focus on today.
1. Boosting Economic Resilience
Let me start with the global economic environment.
Two years ago, 75 percent of the world economy experienced an upswing. For this year, we expect 70 percent to experience a slowdown in growth.1
The good news is that global growth is expected to rebound over the next few months and into 2020. Yet the world continues to face major risks, especially from trade disputes and geopolitical tensions.
This is a delicate moment for all countries, including in this region. The key is to avoid policy missteps, while making sure that the right policy steps are taken.
So what are the steps that Georgia can take to cultivate a more resilient and more vibrant economy? In many areas, sound policies have already produced exceptional economic vintages.
Over the past two decades, extreme poverty levels have declined by nearly three-quarters; life expectancy has increased by about 6 percent, and real per capita income has almost tripled2 . But that is not the whole story.
More recently, Georgia has implemented bold policies to boost economic resilience:
Fiscal deficits are contained; inflation is subdued, banks are well-capitalized, and the unemployment rate has reached a 15-year low. It is not surprising, therefore, to see robust economic growth forecast for this year and next.
These are remarkable achievements and a testament to the resilience and creativity of the Georgian people.
At the same time, Georgia’s economy remains vulnerable to potential shocks, especially from escalating trade tensions and financial market volatility.
Policymakers can guard against these risks in a comprehensive manner: from maintaining exchange rate flexibility, to further increasing foreign exchange reserves, to implementing prudent economic and financial policies.
For example, there is room to further reduce the amount of loans and deposits denominated in US dollars. Why is this important? Because dollarization has left many companies and households vulnerable to sharp exchange-rate movements that could undermine their financial health.
Georgia has already made significant progress on this issue by strengthening the balance sheets of banks and by improving financial literacy. Now is the time to take the next steps—such as further developing the local capital market and promoting institutional investors who could support demand for long-term, local-currency bonds and other financial assets.
Another policy priority is to further reduce debt levels, especially among low-income households. Again, significant progress has been achieved thanks to a tightening of lending standards. This is an important step towards more sustainable credit growth, which is good for individuals and the economy at large.
And yet, even as policymakers manage these challenges, they also need to address the threat of high economic inequality. The fact is that not everyone in Georgia has shared in the benefits of growth in recent years.
IMF research tells us that less inequality is associated with stronger, more sustainable growth. At the same time, excessive inequality is associated with marginalized people, damaged communities, and eroded trust.
These issues are at the very heart of the government’s reform program, anchored in the association agreement with the European Union. These reforms are designed to accelerate convergence to European living standards and foster more sustainable and inclusive growth.
We at the IMF are working in partnership with Georgia on these and many other pressing issues—through our policy advice, financial support, and by providing hands-on training and capacity building. We remain deeply committed to supporting Georgia’s transformation.
2. New Ingredients of a Better Economic Vintage
So what is the best policy response to develop an inclusive and sustainable economy? The short answer is that Georgia needs more higher-quality jobs and higher productivity to boost potential growth and living standards.
This is not an easy task because Georgia’s growth potential has been held back by rapid population aging and the fact that many Georgians are seeking job opportunities abroad.
At the current, long-term GDP growth rate of 5.2 percent, it would take more than 10 years for Georgian living standards to reach those of emerging European nations3 —which shows just how important it is to take the right policy steps.
Here we need creativity to tailor Georgia-specific policies. We need perseverance to bring the reforms to fruition.
And we need powerful new ingredients to produce a better economic vintage. Let me highlight a few of these ingredients:
First—strengthen connectivity within and across borders. Georgia is working hard to transform itself into a transport and logistics hub connecting Europe and Asia. This requires scaling up public investment in high-quality infrastructure.
Work is now underway on the East-West highway connecting Azerbaijan to the Black Sea. And think of the benefits of upgrading Georgia’s port infrastructure, including new ports.
These types of projects could lift productivity growth by connecting local businesses to global value chains, and by encouraging more foreign direct investment in companies that produce tradeable goods and services.
Indeed, the export sector has emerged as a key driver of growth in the past two years, holding out the promise of new jobs with higher wages. Now is the time to take the next step—by unlocking the full potential of the tourism sector and by building on recent trade agreements with the European Union and China.
- Education reform
A second ingredient is education reform, which is part of a broader effort to modernize Georgia’s labor market. There is one thing that you keep hearing from companies and entrepreneurs—“we simply cannot find enough workers with the right skills”
This is why the government is embarking on a fundamental education reform to create more opportunities for all students. That, in turn, could help foster higher-productivity jobs, especially in financial services, transport, and tourism.
Resolving the shortage of higher-level skills will be a game changer. The key is to implement a reform that is truly comprehensive, fiscally sustainable, and aligned with best practices and fresh ideas.
Of course, the benefits of education reform will be felt over the long term. In the short term, there is room for more active labor market policies—from providing better vocational training, to using cutting-edge online tools for jobs matching.
Above all, there is room to encourage greater participation of women in the workforce. For example, a recent study shows that differences in labor force participation between men and women result in significant economic losses for Georgia—equivalent to about 11 percent of GDP per capita.4
Here there are several policies that could make a difference, including more flexible working hours and more affordable, high-quality childcare. This would help ensure that women have a broader range of professional opportunities.
Let us take inspiration from Shota Rustaveli, one of the greatest Georgian poets, who once said: “Lion cubs are equal, be they male or female.”
Good governance and institutional reform
A third ingredient is good governance and institutional reform. We all know that Georgia has a remarkable track record in fighting corruption, especially when it comes to bribery.
A prime example is the anti-corruption campaign in the early 2000s. This involved not only legal actions but also reforming the civil service, improving tax administration, simplifying the tax code, and enhancing public financial management and transparency.
As a result, Georgia saw higher investment, stronger growth, and a sharp increase in tax revenues—from 12 percent of GDP in 2003 to 25 percent only five years later.5 But that is only part of the story.
History teaches us that fighting corruption requires consistent and continuous efforts. In many ways, that fight can never be won, because there is always more to be done. This is the challenge of producing a great vintage year after year.
Here in Georgia, for example, there is room to further strengthen public institutions to provide a more level-playing field for the private sector. This means taking the right steps to modernize the judiciary system to boost transparency and accountability.
It also means building a more efficient insolvency regime. Think about it: it takes only two days and one procedure to register a company in Georgia—but winding down a business can be rather complicated and costly. Speeding up that process would help free up capital that could be invested more productively in other parts of the Georgian economy.
All these ingredients—from connectivity, to education and governance—have one thing in common: government actions alone cannot produce a better economic vintage.
That is why we need to bring together a broader range of stakeholders: from policymakers, to entrepreneurs, to civil society, to development partners, to name just a few. Together we can make a significant difference in the days ahead.
- Young people
But what about the long term? Here we need one more ingredient—and that is the boundless energy of young people.
By transforming yourself, you will be able to transform your community—your country—over the next generation. This involves taking a wider perspective on your own skills.
After all, yours is a world in which individuals and companies are measured by their creativity and innovation. A world that requires a diversity of experiences—not just in math, engineering, and economics, but also in literature, arts, and languages.
Consider using the full range of your skills to create new products and services that resonate here at home and abroad.
Think of the vibrant fashion and music scenes here in Tbilisi. Think of the startups that are reshaping the way we manage our finances and run our business. And think of the young Georgian chefs and wine-makers who are attracting global attention.
You can make your mark, too.
At the same time, your community is looking to you for leadership on some of the most pressing issues of our time: climate change means that sea levels are rising, including in the Black Sea. And there are many questions over how to manage Georgia’s water resources, air quality, and forests.
On these and many other issues, you have a chance to become advocates for change. Connect with your friends and colleagues. Connect with your peers around the world to raise awareness. And connect with the International Monetary Fund—to help us promote the global public good of economic and financial stability—which has been the Fund’s raison d’être for 75 years.
Let me conclude with a quote from the great poet and statesman, Ilia Chavchavadze, who once said: “A man creates his own destiny, but destiny does not create a man.”
There is wisdom in these words—because Georgia is once again creating its own destiny, writing a story of transformation.
Today policymakers have an opportunity to take the right steps to create a more resilient and more inclusive economy.
Today, we are working in partnership to create a better economic vintage—not just for this year but for generations to come.