Georgia: What Will it Take to Build a More Competitive Economy?
Georgia has implemented far-reaching reforms over the past decade, which have helped it navigate the dual shocks of the financial crisis and the 2008 conflict with Russia. To address the country's remaining challenges, the World Bank's Development Policy Operations (DPOs) have supported government reform efforts to strengthen competitiveness, public financial management, and social safety nets. In particular, reforms have helped liberalize trade with the European Union (EU) and improve customs efficiency, power supply reliability, education quality, the transparency of fiscal accounts, and health care and social services.
Georgia’s economy experienced a sharp economic downturn in 2008-09, due to the global economic crisis, the conflict with Russia, and the subsequent closing of the Russian market to Georgia’s exports. These events undermined progress on poverty reduction and had severe consequences for growth, as they led to a sharp deterioration in investor and consumer confidence; a decline in foreign direct investment (FDI), exports, and remittances; and a reduction in domestic lending.
The external shocks intensified existing structural vulnerabilities that were affecting the country’s ability to grow, create jobs, and improve living standards, especially for the poorest. Although a counter-cyclical fiscal stimulus ushered in an economic recovery after 2010, limited progress has been achieved in facilitating sustained and inclusive growth.
In addition, a deepening euro zone crisis and an uncertain global economic environment posed risks for fiscal consolidation and macroeconomic stability. Georgia needed financial support to meet post-conflict and vulnerability needs and to strengthen competitiveness for post-crisis recovery and growth.
DPOs-provided budget support through International Development Association (IDA) credits and International Bank for Reconstruction and Development (IBRD) loans, to accompany the Government’s efforts to strengthen competitiveness and inclusive growth. These DPOs had built on the previous policy lending operations, which helped mitigate the impact of the 2009 economic downturn and prepare Georgia for post-crisis growth in the medium term.
Addressing Georgia’s post-crisis development needs required the implementation of a comprehensive reform program that simultaneously: (i) improved market access, the business environment, and education quality to support competitiveness, promote exports, and attract strategic investments; (ii) enhanced the effectiveness of public financial management to promote fiscal discipline, thus contributing to macroeconomic stability; and (iii) improved the quality and accessibility of health care services and the efficiency of social assistance programs to promote human capital development and increase assistance to the poor.
The DPOs supported structural reforms that helped to improve competitiveness, public financial management, and the effectiveness of social spending. The main results included:
- Progress in meeting requirements for entering the Deep and Comprehensive Free Trade Agreement (DCFTA) with the EU:
- Georgia adopted more than 3,000 EU and international standards for domestic products by end-2015, a 69.5 percent increase since 2011.
- More than 3.5 million animal vaccinations had been administered by end-2015, a fourfold increase since 2012.
- Enhanced efficiency of the customs administration, facilitated by a newly introduced automated selectivity module of the risk-based customs control system for transit traffic at border crossings. The system detected 981 customs violations in November 2015, a nearly 500 percent increase compared to November 2011.
- Improved efficiency, reliability, and transparency in electricity connections in the country, evidenced by several commonly used reliability indicators. For example, customers served by JSC TELASI, one of Georgia’s largest electric power utility companies, experienced 20 percent fewer service interruptions in 2015 relative to 2013. In addition, the “Getting Electricity” subcomponent of the Doing Businessindex registered 70 points in 2016, 8 points higher than a year before, showing improved efficiency, reliability, and transparency in electricity connections in Georgia.
Improvements in the quality of education through:
- teacher training in formative assessment techniques to improve student learning; 42 percent of teachers received training by end-2014, a 9 percentage points increase since 2011.
- an improvement in student learning, as recorded by the Program for International Student Assessment (PISA) and Trends in International Mathematics and Science Study (TIMSS) in 2015. Student performance improved noticeably in all subjects between 2009 and 2015, with the highest gain in science.
- Contribution to improvements in public financial management, evidenced by the strengthened quality and timeliness of annual financial statements recorded by the Public Expenditure and Financial Accountability (PEFA) indicator (PI-25), whose rating for Georgia improved from a D+ in 2008 to a C+ in 2012.
- Improved safety and quality of health care standards in hospitals, evidenced by 88 percent of hospitals submitting detailed reports to the State Regulation Agency for Medical Activities in compliance with upgraded standards in 2014 compared to none in 2011.
- Introduction of the Universal Health Care System in 2013, which expanded state-funded health care access to 3.7 million people from only 1.6 million people in 2012.
- Improved efficiency of social assistance, evidenced by the reduced time taken to issue a state pension after assessing eligibility: three days in 2014 relative to 10 days in 2011.
World Bank Group Contribution
- The operations disbursed a total of US$212.7 million over the 2012–14 period. The IDA credits amounted to US$110.7 million, and the IBRD loans amounted to US$102 million. The DPOs also made use of complementarities with other Bank operations, for example, the Public Sector Financial Management Reform Support Project and the Health Sector Development Project.
- In addition, the Strengthening Accountability and the Fiduciary Environment (SAFE) supported the PEFA and assisted the Government in developing health sector reforms and addressing the capacity constraints of key public sector agencies. The IBRD provided an analytical foundation and timely technical assistance on the policy agenda to help identify relevant policy options, complement policy dialogues, and provide the necessary information and recommendations for a policy framework supporting the Government’s development strategy.
- IBRD worked closely with the U.S. Agency for International Development (USAID), the EU, and the European Bank for Reconstruction and Development (EBRD) during the preparation of the operations. Each multilateral agency provided technical assistance and coordination on the reform program. In particular, USAID and the EU supported the series by providing technical assistance on trade facilitation, especially in the context of the DCFTA negotiations.
- The International Finance Corporation (IFC), USAID, and EBRD supported the Government’s power sector strategy. IBRD also maintained close collaboration with the International Monetary Fund (IMF) to provide technical assistance and policy dialogue on macroeconomic developments, debt sustainability, fiscal policy, and public financial management.
- In addition, the Government of Georgia and IBRD teamed up to strengthen outreach and consultations with civil society to receive feedback on reforms and better explain the Government’s policies to the public.
- In 2014, Georgia graduated from IDA to become an IBRD-only borrower. IBRD continues its close policy engagement and budget support with Georgia. The DPOs were followed by three Inclusive Growth Development Policy Loan (IG DPL) operations spanning 2015–17.
- The new operations continue to address the most urgent development objectives and focus on supporting the Government in its efforts to improve public service delivery and strengthen fiscal management to make growth more inclusive. The first operation in the series, IG DPL (US$60 million), was approved by the Board in April 2015. The second operation was approved in April 2017.
- The immediate beneficiary of these operations is the Government of Georgia, which has been using the analytical and financial resources to support policy decisions and implementation of numerous reforms. These policies have already benefitted population at large and their impact will continue as the reforms are expected to improve the quality of worker skills and health outcomes, generate more jobs and reduce poverty.
- The DPO-supported reforms have bolstered investor confidence and improved competitiveness by reducing business costs and making it faster and easier to move goods in and out of Georgia. “The Customs people treat us well. I don’t even have to leave the truck. The papers are processed in five minutes. Everything is done in an orderly fashion,” said Otar Mdivnishvili, a truck driver at the newly reconstructed Sarpi Customs checkpoint on the border with Turkey.