The Republic of Georgia’s Uncertain Economic Future

Over the past ten years the Republic of Georgia has seen a remarkable amount of economic progress.  Twenty-one years ago, Georgia was one of the Soviet republics, and struggled economically after the break-up of the Soviet Union.  Its economic turnaround came with the election of Mikheil Saakashvili as president in 2004.  He fired all the police and vastly reduced corruption by eliminating most regulations.  Without regulations, people don’t have to bribe corrupt government officials to get things done.  Georgia’s low trade barriers opened the country up to commerce, and the country experienced remarkable economic growth.

President Saakashvili was not without his critics.  His government was accused of confiscating property without compensation, election fraud, and cronyism.  Meanwhile, political discussion in Georgia often turns on the country’s uneasy relationship with Russia.  Russia invaded Georgia in 2008, and Russian troops still occupy a part of Georgia.  Because of the Russian threat and the political pressure it brings, many Georgians want their country to have closer ties with the EU, and closer ties with NATO, to insulate Georgia from Russia.

Georgia changed its constitution last year, shifting much political power from the president to the prime minister, and in last year’s elections Saakashvili opponent Bidzina Ivanishvili was chosen as prime minister.  Ivanishvili campaigned on a platform of establishing closer ties with Russia, and eliminating the corruption and cronyism that many saw in the Saakashvili government.

Whatever the complaints against Saakashvili, he did deregulate and implement very free-market reforms in Georgia, which led to Georgia’s strong economic growth during his presidency.  There is some indication that the new government will undo some of those free market reforms.  They have already passed some labor market regulations to move Georgia closer to an EU-style regulatory environment.

One source of tension here is that although Georgians want closer ties with the EU, the EU says that for that to happen, Georgia needs to adopt EU-style regulations to level the economic playing field.  In other words, EU officials recognize that their labor market regulations are costly, and want to impose the same costs on Georgia.  The opinion of Georgians is divided.  Some argue for more regulation because it can bring closer ties to the EU; others argue that Georgia should not bow to EU pressure to undo the free market reforms that have generated so much economic growth over the past decade.  It appears that re-regulation is already underway.

With the change in government, Georgia is now at a crossroads.  Economic growth has slowed nearly to a stop in the past year, and Saakashvili will be replaced as president in an October election.  I was in Georgia a few weeks ago, and talking to Georgians who have a very free-market perspective, I heard differing opinions on the upcoming presidential election.  Some Georgians hope that Ivanishvili’s candidate will win, to present a unified government to the rest of the world, which can encourage foreign investment.  Others argue that Georgia would fare best with a president from an opposition party, with the idea that divided government can limit the power of Ivanishvili’s government to undo the reforms of the previous decade.

Georgia is a small enough country that those outside the country might wonder why they should care.  One reason is that Georgia can provide a model for other countries, but also they might be an example of the potential — or lack of potential — for free market reforms to succeed in transitioning economies.

Georgia was so successful in its economic reforms under Saakashvili, but if Saakashvili’s critics are right, Saakashvili was able to appropriate some of the benefits of that success through cronyism and corruption.  This raises the question of whether economic reforms like those seen in Georgia can be sustained in countries that have only recently transitioned from socialist dictatorships.

Randall G. Holcombe is Research Fellow at the Independent Institute and DeVoe Moore Professor of Economics at Florida State University. His Independent books include Housing America: Building Out of a Crisis (edited with Benjamin Powell); and Writing Off Ideas: Taxation, Foundations, and Philanthropy in America .
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