Georgian lessons for the CIS

By bne IntelliNews April 29, 2015

Mark Adomanis in Philadelphia -


The tiny Caucasus republic of Georgia is arguably the former Soviet Union's star reform pupil. It is close to the top of the World Bank's “Doing Business” ranking, well ahead of many EU countries, and retains the enviable title of the “world's fastest reformer”. Georgia has thrown itself into the arms of the EU project to such an extent that it withdrew from the Commonwealth of Independent States (CIS). And it will have a chance to bask in its glory in mid-May when over 2,000 delegates will descend on its church-studded capital Tbilisi to attend the European Bank for Reconstruction and Development (EBRD) annual general meeting.

The EBRD get-together will be a chance for the plucky little republic, which was invaded by Russia in 2008 and has lost several regions to separatism, to both showcase its wares as well as take stock of its reforms.

One obvious conclusion in looking at Georgia is that despite its rapid and impressive progress, it is still a very long way from converging with Western European standards of living. The population is still relatively poor, huge amounts still need to be invested into basic infrastructure and its government institutions, while vastly improved, remain well below par. Finally, the last few years have shown that building a true democracy in the region remains an extremely messy process due to both internal divisions and regional instability.


Russia's annexation of Crimea in 2014, and the proxy war it has been fighting with Kyiv in the Donbas ever since, has heavily impacted coverage of all other countries in the CIS.

Fairly or unfairly, virtually all reporting of Georgian politics in the West is influenced (and more often than not, severely distorted) by Western perceptions of Russia. As a small country in a far-away corner of the world there’s very little desire among the mass media to try to comprehend Georgia’s inner workings on their own merits. Instead, everything is viewed through the prism of being “pro” or “anti” Russian, and then lumped into categories of good and bad accordingly.

The journey from a centrally planned adjunct of the Soviet Union to a liberal free market economy with a mature and accountable political system was never going to be a straight line.

However, the inevitable turbulence accompanying Georgia’s transformation is often confused for being a binary fight between Russia and the West. That is to say that when Georgia is seen to be liberalizing, it is thought of as the West’s; and when it is seen to be regressing, it is thought of as moving back towards Russia. The blanket conflation of liberalism and anti-Russian foreign policy (and, conversely, illiberalism and pro-Russian foreign policy) has very little basis in objective reality, but is nonetheless depressingly common.

Georgia’s Rose Revolution of US-educated Mikheil Saakashvili that swept out the corrupt old school administration of Eduard Shevardnadze in 2003 was greeted with exultation in both Brussels and Washington. But the 2012 electoral triumph of Bidzina Ivanishvili and his Georgian Dream coalition came as a rude surprise.

Saakashvili and his United National Movement (UNM) enjoyed rock star status in Washington and broad bipartisan support. Georgia's aspiration to adopt Western values was intimately connected with Saakashvili personally. By contrast Ivanishvili, a billionaire who made his money in Russia in the 1990s before selling up and moving back to his homeland to go into politics, was seen as somehow being a Russian plant. The knee-jerk assumption was that anyone who was anti-Saakashvili was anti-reform and, in essence, pro-Russian. One high-profile conservative columnist for the Washington Post even went so far as to call Ivanishvili “Putin's man in Tbilisi”. However, Georgian Dream went on to win additional electoral victories in 2013 and 2014. By mid-2014, after a clean sweep of municipal elections, the party was in control of every level of government and its influence over Georgian politics was at an all-time high.

Saakashvili, like Russia's Boris Yeltsin and Mikhail Gorbachev before him, was popular in the West but deeply unpopular where it counted: at home. Conversely, Russian President Vladimir Putin, who has explicitly rejected the Western values for an Orthodox conservatism, is despised in the West, but after a seven-fold increase in Russian incomes, is virtually canonized at home.

Predictably, this tendency towards Manicheanism based on ideological choices rather than economic results has resulted in some exceedingly poor political analysis and quite a lot of misunderstanding.

Consider Azerbaijan, which, objectively, has a far worse human rights record than Russia, but which is nonetheless treated as a “responsible stakeholder” by the US and the EU (which is desperate to get access to Azeri natural gas).  Most recently, both Brussels and Washington have dropped the “last dictator in Europe” label of Belarusian President Alexander Lukashenko after he showed tentative signs of rebelling against Russia's bullying of its co-members in the newly established Eurasian Economic Union (EEU).

Georgia's “pro-Russia” turn in policy never materialized after the change in government. Most governments in the region are, at the end of the day, more interested in economic development than in signing up to a particular ideological camp. Their success depends partly on the political system they choose, but more important is the sort of hand they were dealt following the collapse of the Soviet Union. Russia's relative prosperity despite explicitly rejecting Western mores, and Georgia's relative poverty despite explicitly embracing them, highlights this problem. It should also serve as a warning for a country like Ukraine, where the political leadership seems to think that loud protestations of “common values” will have an economic benefit.

Given the geopolitical cataclysm unleashed by Ukraine's quest for a free trade and association deal with the EU, Georgia’s signing of a broadly similar agreement in the summer of 2014 attracted bizarrely little attention. Its adoption of the Deep and Comprehensive Free Trade Area (DCFTA) this year will open up the local market to European investors and it hopes this will attract significant investment.

While there are reasons to be suspicious of the Association Agreement’s actual economic merits – since tariffs between Georgia and the EU were already quite low, the impact of eliminating the remainder is unlikely to be very large – from a political standpoint it is a major step forward in the Caucasian country’s quest to join Europe. From an institutional standpoint, certainly, Georgia has never been more in tune with the EU.

And that is the first important lesson that Georgia holds for the rest of the CIS: each country’s politics needs to be understood on its own terms, and not simply as part of a proxy fight between Russia and the West. Yet this mistake is regularly repeated not only in Georgia, but in the Baltics, Poland, Bulgaria and other Eastern European members of the EU and Nato.

Expecto properitum!

Georgia’s recent progress on the economic front has been a bit slower than in the immediate aftermath of the Rose Revolution, but despite recent accusations that Georgia's business climate is deteriorating – The Economist in particular has been witheringly critical of Georgian Dream's economic stewardship – it remains the best post-communist performer on the World Bank's “Doing Business” survey.

Georgia finished in 15th place in 2015, ahead of famous reform stalwarts like Poland, Estonia, Latvia and Lithuania, and substantially ahead of laggards like Bulgaria and Romania, as the chart shows.

Few other countries anywhere in the world, let alone those saddled with a baleful communist legacy of a corrupt and omnipresent bureaucracy, have achieved anywhere near Georgia’s progress in cutting red tape, paring back the state’s reach, and improving the predictability and transparency of business regulation. Georgian Dream, then, has largely preserved the previous government’s signature accomplishments in the economic sphere.

However, several other countries that retain repressive political regimes have also made significant progress on this metric, including Kazakhstan and Belarus, which was one of the fastest risers through the ranks in 2014.

The problem is that a high "ease of doing business" score in the World Bank survey doesn’t translate directly into lots of profitable business. By any objective criteria, Georgia remains an extremely poor country. According to International Monetary Fund (IMF) figures (which have also been adjusted for purchasing power parity), Georgia's 2013 per-capita income ranked 118th in the world, lagging well behind Kazakhstan and Belarus. On the flip side of the same coin, Russia is only slightly behind Poland in per-capita income even after the current bought of stagnation set in.

After a decade of rapid growth, Georgia was at essentially the same level of per-capita income as its famously dysfunctional Caucasian neighbour Armenia. Georgia was actually poorer than countries like Morocco, Swaziland and El Salvador – hardly a who’s who of international economic juggernauts. This isn’t fault of either the UNM or Georgian Dream – it’s simply a testament to how far behind the country started.

The disjuncture between Georgia’s best-in the-world performance in the “Doing Business” survey (no country has made a bigger jump in the rankings over the past decade) and its still-terrible per-capita income needs to be kept in mind.

The UNM lost the 2012 parliamentary election to Georgian Dream in large part because of widespread concern among the Georgian public over high-unemployment and extreme economic inequality. Economic growth after the Rose Revolution was real, but the perception persisted that it was not being broadly shared. This, obviously, was a problem.

All too often Western experts imbue liberal economic reforms with a nearly magic ability to improve the average citizen’s quality of life. Other factors driving growth must include natural resources, the current state of industrialisation, the workforce’s education level, the existence of basic infrastructure and even proximity to developed markets. These factors aren’t easy to change, but all weigh as much, if not more in the development of the economy as the World Bank’s business index.

Despite all of the laudable improvements in Georgia's business environment, the transport infrastructure (the ports, roads, railways, and communications systems necessary to support international trade) is rated by the World Bank as even worse than that of Russia or Belarus, and much worse than other successful post-communist reformers like Estonia, Lithuania and Latvia. Progress on the infrastructure front is much more difficult than moving up the World Bank’s “Doing Business” index, but ever more necessary if Georgia is to advance higher up the economic ladder. There are certain ways, like public-private partnerships, to help smooth this path. But the simple fact remains that building roads and railways is a core state function and that private enterprise cannot solve this problem on its own.

Can’t escape history

By dint of history and geography almost all the countries in Emerging Europe – including Georgia – remains extremely vulnerable to Russian economic and political pressure. The fates of all the countries in the region are, like it or not, inextricably linked to Russia's fate, which the EBRD's former chief economist Eric Berglof identified as one of the crucial "investment nodes" in the region.

A 2006 Russian ban on Georgian wine, mineral water and agricultural imports was lifted at the end of 2013, and Russia swiftly returned to its traditional position as one of Georgia's largest trade partners (preliminary data indicates it was Georgia’s third-largest trade partner in 2014). There is a strong possibility that Russia could re-impose trade sanctions in the future – a step which would have an obvious and highly negative impact on Georgia’s growth prospects.

Many other CIS countries, due to their Soviet inheritance, still have strong economic, cultural, and political ties to Russia. Given Russia’s demographic and economic heft (it is several times larger than the next largest post-Soviet state), these ties mean that Moscow has a great deal of practical leverage. Even if we don’t like it, Russia will inevitably continue to play a leading role in the region.

Ukraine finds itself in an even more uncomfortable position. Officoal data shows that in January Ukraine’s year-over-year export of Ukrainian goods to EU markets fell by 31%, but those to Russia dropped by 60%. The Russian market is now effectively closed to Ukraine and it cannot easily redirect sales to Europe. In the short term, Ukraine’s low-quality manufactured products can only be sold to Russia and have no other realistic markets, irrespective of the generosity of the DCFTA terms: German car manufacturers aren’t suddenly going to use Soviet-designed diesel engines no matter how cheap they are.

Georgia’s experience shows that Russia’s influence can be weakened, but that ending it is virtually impossible. Saakashvili was famously irascible in his dealings with Russia, routinely castigating the Kremlin and making plain the contempt he felt for Putin and the rest of the Russian government.

Georgian Dream’s policy, on the other hand, has been much less vocal, but much more effective; it has embraced restarting trade with Russia, but is gradually moving the economy closer to Europe. Other CIS states looking to distance themselves from Russia would be wise to keep that experience in mind: to work deliberately to cultivate economic and defence ties with the West while, in public, staying mum.

People problem

Russia's “dying population” has been incessantly cited as one of the country's major problems – despite the fact that the population is naturally growing for the first time in two decades. But deteriorating demographics is a problem shared by almost all of the countries across the region.

As in the rest of the former Soviet Union, Georgia’s poor demographic situation is set to become an economic headwind in the coming years, though one that is rather less severe than in most of the other former Soviet republics. The situation is worst in Ukraine (due to low life expectancy and high death rates) and Estonia (due to high emigration rates, especially amongst the young, who are almost exclusively leaving for London).

While Georgia did experience a decrease in its total fertility rate during the 1990s, this decline wasn't as steep or as sharp as it was in Russia, Ukraine or the Baltics. Added to the fact that Georgian fertility in the 1970s and 1980s was substantially higher than in the core Slavic republics, the result is that the country has not experienced sustained natural population losses (though it did suffer from significant emigration).

However, while Georgia is not suffering a demographic crisis nearly as severe as those in other European parts of the former Soviet Union, it must confront the reality of a population that is swiftly aging. According to projections from the US Census Bureau, the share of Georgia’s population older than 65 is projected to grow from the current level of 15% to more than 20% by 2028. By 2050, a full quarter of the Georgian population is projected to be older than 65 (for comparison’s sake, that’s roughly the same share as Japan today).

Thus even in those post-Soviet countries like Georgia, Azerbaijan and the “stans” of Central Asia that have relatively good demographics – Uzbekistan is expected to overtake Ukraine to become the third most populous county in Eurasia by 2020 – the future will see a structural change in population composition that will inevitably put significant pressure on healthcare and pension systems that are already significantly underdeveloped. Demography isn’t simply a concern for places like the Baltics, Russia and Ukraine – it is a region-wide concern that will absorb increasing quantities of high-level political attention.

Tough decisions ahead

Georgia’s experience shows both how far the region has come since communism first collapsed and that, despite this progress, the task of transforming the post-Soviet world into a “normal” part of Europe, with efficient bureaucracies, dynamic economies and robust democratic political institutions, remains an amazingly complex and difficult one.

In particular, Georgia shows that slashing bureaucracy and cutting red tape is a necessary but not sufficient condition for broadly-shared economic prosperity. After corruption has been eliminated, or at the very least constrained, and after the grasping hand of the state has been put on a leash, there are much more difficult (and much more expensive!) tasks that remain.

Georgia has, in some ways, provided a textbook of how to make changes that are so badly needed across the region. When Viktor Yushchenko took over from Leonid Kuchma as president of Ukraine following the Orange Revolution in 2005, he told the first group of foreign investors to visit the country: "We are going to do a Georgia”.

However, in order to meaningfully converge with Western Europe, CIS countries including Georgia must also enhance their state capacities so that they are capable of effectively managing large-scale infrastructure projects. That’s not going to be easy, but it’s where the region needs to head.

With additional reporting by Ben Aris in Tbilisi and Henry Kirby in London.


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