Georgia's Politics Shoots Its Economy In The Foot

Georgian president Mikheil Saakashvili delivered a passionate anti-Kremlin speech at the UN General Assembly in New York last week. He warned that it’s not in Russia’s interest to have strong, peaceful neighbors. As their independence grows, so shrinks the chance they’ll join Putin’s Eurasian Union.

The speech is Saakashvili’s farewell to his two-term presidency, which ends in October. It was also his address to Georgia’s current government, headed by Prime Minister Bidzina Ivanishvili, Georgia’s richest man(net worth $5.3 bln). Ivanishvili, his fortune made mostly in banking and trading metals in Russia, is known for his diplomatic attitude towards Georgia’s sometimes overpowering Slavic neighbor.

The end of Saakashvili’s presidential term coincides with Georgia entering a phase of political uncertainty and economic instability—a sharp decline after all the progress observed over the past decade.

Since Saakashvili became president following the peaceful Rose Revolution in 2003, Georgia has improved its infrastructure, modernized cities and become a relatively safe and comfortable place to live. Rich in tourist attractions — the Caucus Mountains, the Black Sea, skiing, winery tours, ancient churches – Georgia now attracts travelers from all over the world. Saakashvilli’s government became famous for its success in fighting lower-level corruption and bureaucracy. But the high economic hopes the president had for his country are taking a pessimistic turn.

This year the Georgian economy has slowed down as foreign capital dried up—after Ivanishvili’s coalition, Georgian Dream, won majority in parliament a year ago. Frustration and decline have been creeping into all industries, from construction to banking to retail. The forecast for foreign direct investment has recently been cut to about $1 billion in 2013 (down from the expected $2 bln) and the GDP growth stalled to 1.4% in the second quarter of 2013, compared to 8.2% in last year.

One might blame the decline on political change, but there are several reasons.

“The previous regime has built some economic growth, largely on borrowing money and foreign assistance. There was no real sustainable growth, real energy to the economy,” says Lincoln Mitchell, an expert on the Caucuses at the Harriman Institute at Columbia University in New York, who advised Ivanishvili’s Georgian Dream.

Some hold the Ivanishvili’s administration accountable at least partially for what’s happening today, asserting that the new government didn’t offer a clear strategy for economic development.

“Ten months is enough to at least understand which way they are going and what they are going to achieve,” said Ghia Nodia of the Caucasus Institute for Peace, Democracy and Development and a professor of politics at Illia State University in Tbilisi. Nodia briefly served as the Minister of Education and Science in Saakashvili’s government. “Frankly, I don’t see anything that provides any hope or indication that they have a sense of direction.”

Mitchell suggested that the Georgian government is playing a waiting game: “Everyone in the government cares about the economy, no one really knows what to do about it.” It’s not uncommon for the political lead to wait and see how the situation develops, he added.

Since Ivanishvili took office, Georgia has restored some diplomatic ties with Russia in order to reinstate the trade between the two countries (under Saakashvili there was no cooperation between the two countries. In fact, in 2008 there was a five-day border war that received close international attention and caused much distress to Georgian society.)

Today’s uncertainty in Georgia hasn’t been helped by Ivanishvili’s announcement this summer that his job is done and he’s leaving office after the presidential elections in October 2013.

“[Ivanishvili] is leaving in one year, when nothing is accomplished,” Nodia said. “He has the mentality of a businessman who acquired a company – its name is Georgia – and now he wants to give it to one of his lieutenants to be managed.”

Ivanashvili’s leave would have a more serious impact on Georgian politics and economy than the presidential elections because in Georgia the Prime-Minister plays a bigger role than the president.

For the U.S. and Europe, Georgia was an example of successful democratic reforms in the post-Soviet territory. However, many Georgians themselves are not so sure about the democratic nature of Saakashvili’s methods as the government has appeared authoritarian and heavy-handed, arresting thousands of people in an effort to fight bribery and create transparency. Meanwhile corruption flourished in the upper echelons.

Georgians were happy to transition from a struggling existence without running water and electricity before the Rose Revolution, towards an improved quality of life and a functioning economy. To less fortunate post-soviet countries – permanently stuck in economic decline, political turmoil and corrupt mentality – Georgia has become some sort of a role model.

“Clearly, the previous government did a lot to improve the economy and the investment environment. Georgia is the post-soviet country that has undertaken massive improvement,” said Anders Aslund, a Swedish economist specializing in the Post-Soviet economic reforms. He said that the uncertain situation scares foreign investors.

Mitchell argues that there are other reasons not to invest in Georgia: tough market and tough economy in general. Territorial disputes with Russia won’t be easily resolved by any government. And “wine and tourism are extremely competitive industries,” he adds.

Today, Ivanishvili’s team sees the urgency in issues other than simply economic: they work on de-politicizing the state institutions and criticizing the previous rule. Both Saakashvili’s and Ivanishvili’s proponents agree that the previous government went overboard with enforcing power and applying a strong hand.

A member of Ivanishvili’s government, Irakli Sesiashvili, Chairman of the Georgian Parliamentary Defense and Security Committee said: “For me, the parliamentary control, democracy of the security system, is one of the main goals — to strengthen the democratic control over the security system.” In the past, Sesiashvili accused Saakashvili’s party United National Movement of embezzlement and using state power for Saakashvili’s political interests.

The Prime-Minister doesn’t plan on encouraging Russian abuse. Russia continues pushing onto Georgian territory at its northern border. Complicating that issue, Ivanishvili has stated that he is interested in Georgia joining NATO, which gives the Kremlin reasons for concern.

Ivanishvili’s leave may destabilize the economic situation further and deepen Georgian problems. While it’s not benefiting Georgian financials, the good news is it could benefit Georgian democracy, says Mitchell.

“One of two things could happen: either everything collapses or it really moves beyond the politics of one kind of big man, charismatic leader,” Mitchell says. Without Ivanishvili, Georgian Dream – the coalition of six rather diverse political groups — could crumble and that would lead to real debates in parliament and allow more voices to be heard. “That would actually move democracy forward,” he said.
Forbes, Oct 3, 2013