Georgia Declares War on Poverty

from Eurasia net

Molly Corso

Georgia’s recently confirmed cabinet is pressing ahead with an ambitious five-year plan to steer the country out of the stubborn poverty that has plagued it since independence. While the basic elements of the program come as no surprise, some analysts are questioning how realistic the government’s goals are.

The program, Georgia Without Poverty, is an extension of President Mikheil Saakashvili’s own campaign promises. Slated to run from 2008-2013, the plan attempts to address a variety of issues -- everything from normalizing relations with Russia to turning the country into an international financial center.

Solving Georgia’s domestic social ills is at the heart of the initiative: the government expects new and on-going reforms to result in 200,000 new jobs over the next five years. There are also plans to raise pensions to a $100-per-month minimum, and to allot at least one-third of the state budget to social programs.

The accent on social welfare was expected after Saakashvili’s presidential election campaign, during which he reached out to the socially vulnerable -- a shift from his previous, foreign-policy-driven messages. Opposition leaders have successfully used Georgia’s stubborn unemployment problem and low wages to score political points. Monthly wages currently stand at $265, according to January 2008 government data, while unemployment stood at 13.6 percent for 2006, according to the latest figures available from the Department of Statistics.

In his January 20 inauguration speech, Saakashvili gave the government 50 working days to develop programs that would mark “the first steps towards a Georgia without poverty.”

“If you fail to produce results, neither friendship nor other links will guarantee your position in the cabinet,” he told the new cabinet during a February 1 meeting, according to Georgian media reports. “People expect more vigorous, more active and effective work from us, as well as concrete results.”

The deadline’s timing is politically important; Georgia’s spring parliamentary elections are expected in May, making the due date for the government’s “first steps” fall within the ballpark of the start of campaigning.

Some officials have already gotten to work. Plans presented by Prime Minister Lado Gurgenidze calls for a strict fiscal policy to provide the economic push to finance the social program, cap inflation and facilitate steady economic growth at a projected annual rate of 8 percent.

According to the program, sweeping changes to the National Bank of Georgia and budgetary process will help counterbalance the spending required to finance initiatives like the government’s “cheap credit bank” -- a 300-million-lari ($188 million approximately) initiative designed to give businesses access to long-term, inexpensive credit. Entrepreneurs would be expected to use the cheap credit to expand their operations and to create more jobs.

If the proposal becomes law, the National Bank of Georgia will be required to maintain an annual inflation rate of 10 percent -- current estimates place inflation in Georgia at 11 percent. If inflation targets are not met within the fiscal year, the parliament will have the right to dismiss the bank’s president and vice-president. The changes include restructuring the bank to include a Financial Supervising Agency, which will serve as the financial sector’s only regulatory body.

Other aspects of the draft legislation include a proposed cut in taxes -- from the current 25 percent income tax rate to a more attractive 15 percent. The government has expressed hope that by lowering the tax rate, more businesses -- and jobs -- will be created. An overall decrease in spending is also planned: the government hopes to reduce expenditures from 32 percent to 29 percent of the country’s total GDP.

Gurgenidze projected that foreign investment over the next five years will be expected to play an important role in creating the promised 200,000 new jobs.

There are also plans to create two new funds, a so-called Fund for Future Generations and a Fund for Stable Development, which both would handle projected budgetary surpluses and privatization revenues. The funds will reportedly not be subject to Georgian tax legislation.

Economists have mixed feelings about the projections and the new fiscal policy.

Davit Narmania, a professor of finance at the Georgian Institute of Public Affairs and former head of the Georgian Young Economists Association, says that his support for the prime minister’s initiative comes with reservations. Of particular concern are the two funds, he says. The draft law for their creation is unclear about how they will be administered, bringing to mind “problems” encountered in the past with such “special purpose” government funds.

Narmania, though, applauded Gurgenidze’s plans to lower the income tax over the next five years, and to create jobs via the plans for a free industrial zone in the Black Sea port of Poti -- although he noted that there are “a lot of questions” about how the zone will be structured.

A lack of detailed public information about the 26 laws the government is pushing through parliament as part of the initiative adds to the concern, he said.

Other economists question the government’s capacity to meet their own projections. According to Paata Sheshelidze, president of the libertarian New Economic School in Tbilisi, while Georgia, in theory, could post single digit inflation and robust growth every year, a lot will depend on the government’s own actions.

“Inflation under 10 percent is realistic if government spending will be under control and will be under 20 percent of GDP [maximum],” he said in an e-mail interview. “[Economic] growth could be 8 percent and even more, if property rights will be secured and government spending will be limited.”

Sheshelidze added that he is “skeptical” about the job creation plans, even with increased foreign investment. “Indirectly, when they lower barriers and taxes, more options to do business will arise, but opportunities can be realized only if potential investors believe that [the] government will not change the rules,” he wrote. “In Georgia…[the] government changes rules almost each month.”

Eric Livny, executive director of the International School of Economics at Tbilisi State University, was also cautious about tying news jobs too closely with foreign investment. “[Y]ou have to be able to have some capacity to help yourself; you can’t just wait for others to do the job for you. And this is true for investment,” he said.

Any economic projection will depend on many factors, including the country’s public image overseas and its relationship with Russia, Livny added. “I think as you look into the future a lot depends on the public relations,” Livny said. “I would be hesitant now to make projections on FDI [foreign direct investment], for instance, because a lot will depend on the image.”

He noted that investors are looking for signs of stability after the political unrest in November. [For background see the Eurasia Insight archive].

“Last fall and winter were bad for public relations,” he said. “I think most investors are looking for signs of stability and improvement in democratic performance before they decide.”

The Georgian National Investment Agency is projecting $2 billion in foreign direct investment in 2008. Bankers and government officials working with potential investors noted that there was a “pause” in foreign investment during the political crisis, although most have indicated that there has been increased interest since the elections.

Editor’s Note: Molly Corso is a freelance reporter based in Tbilisi.