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Georgia

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Economic liberalisation
Combating corruption
Shortcomings
Development potential
Priority areas of German cooperation with Georgia
Sustainable economic development
Energy and nature conservation
Municipal development and democracy

Situation and Cooperation

View of the city of Borjomi. (c) phalanxSince regaining independence in 1991, Georgia has been struggling with internal challenges. In the wake of the peaceful revolution of autumn 2003 (the Rose Revolution), free elections were held, which returned Mikheil Saakashvili as president. He was re-elected for a further term in January 2008. The government is placing great hopes in its partnership with western states, especially the USA and the Federal Republic of Germany. Georgia would like to join NATO in the short term, and to accede to the European Union in the longer term.

Georgia's admission into the Council of Europe at the end of the 1990s and the advent of the EU's Neighbourhood Policy (ENP) in 2004 have made the country an important European partner. An ENP action plan for further cooperation was drawn up between Georgia and the European Commission in 2006.

Russia's support for the breakaway territories of Abkhazia and South Ossetia and Georgia's clear orientation towards the west are badly tarnishing political and economic relations between Tbilisi and Moscow. In August 2008 the conflict escalated. Open hostilities broke out between the Georgian army, South Ossetian and Abkhazian militias and the Russian army. Shortly afterwards, Russian recognised Abkhazia and South Ossetia as independent states. To bring about a settlement of the conflict, the President of the Council of the European Union, Nicolas Sarkozy, brokered a ceasefire plan for Georgia, South Ossetia and Abkhazia (known as the six-point agreement).

The major challenges for Georgia's political leaders, however, are to tackle the country's still crushing poverty and to ensure that economic development has a broader impact. The country's development is also constrained by shortcomings regarding legal certainty and administrative weaknesses of the government.

Economic liberalisation

Inside a fabric in Georgia producing children's clothes. Copyright: KfWGeorgia's economy is market-oriented, but the radical process of transforming the economy that was launched after the collapse of the Soviet Union is still far from complete. Despite the fact that economic growth has stabilised at a creditably high level of around nine per cent over the past few years, around half of the population are still living below the poverty line. The average wages of large sections of the population are below the minimum necessary for subsistence. In the Human Development Index, Georgia is ranked 96th out of 177 countries (HDI 2007/08).

There are very few signs of economic development in rural areas. Municipalities and districts lack the capacities and the resources they would need to play an active part in promoting trade and industry. The development of agriculture is being hampered by inefficient land use, poor infrastructure, low quality of processing and poor training conditions. The mostly small farms often cannot operate profitably; subsistence agriculture is predominant. Tax legislation has been greatly simplified over the past few years, and state revenues have improved considerably.

Combating corruption

Since the 'Rose Revolution' of 2003, the government has been tackling corruption and tax evasion with considerable success. Although from time to time the process falters, significant progress has been made. Nevertheless corruption continues to hamper economic development. In the 2007 report of Transparency International, an organisation that works to fight corruption worldwide, Georgia was awarded only 3.4 out of a possible 10 points.

Shortcomings

Potential investors and other entrepreneurs continue to complain about the lack of legal certainty in Georgia. It is difficult to enforce legal entitlements.

Major shortcomings can also be seen in the education and health sectors. While during the Soviet era free access to education facilities was guaranteed, this is only true of primary education today. Because of the lack of funding, the quality of education on offer has fallen, which will in the medium term have a negative impact on the country's economic development. In the health sector too, health care has been largely privatised, putting many services beyond the reach of poorer sections of the population.

Development potential

Production at a bakery in Georgia. Copyright: Photothek.netGeorgia has great development potential. Since independence it has laid the legal foundations for the establishment of a stable democracy. They must, however, still be implemented and enforced. The country's geographical position makes it an important transit country between the EU and Azerbaijan and Armenia, and indeed on to Asia. A major factor here is the transport of oil and gas from the Caspian region. In geostrategic terms, the country also has the potential to act as a north-south transit route between Russia, Turkey, Iran and the Middle East, although this is not currently used.

Georgia also has its own deposits of raw materials, such as manganese, gold, coal and oil. Agriculture has particularly good chances of developing. If the infrastructure were upgraded there would be great potential for international tourism. There are good resources for renewable energy, especially hydropower. Currently the Georgian population is well educated, but standards are at risk of declining.

Priority areas of German cooperation with Georgia

In the field of bilateral development cooperation, Germany is the second largest bilateral partner of Georgia, behind the USA. During negotiations held with the Georgian government in 2011, Germany pledged funds of 49 million euros. Cooperation with Georgia is part of the BMZ Caucasus Initiative and the European Neighbourhood Policy. The sectoral priority areas of the Caucasus Initiative are:

  • Sustainable economic development

  • Energy and environmental protection

  • Municipal development and democracy

At an international donor conference held in October 2008 Germany pledged just under 34 million euros for tackling the material, economic and social impacts of the armed conflict of August 2008. German support is focused in particular on housing construction for refugees, funding to enable the rehabilitation of municipal infrastructures, and support for small banks that provide loans for business start-ups.

Sustainable economic development

The single most important challenge facing Georgian economic policy is tackling poverty. To date, corruption, an inefficient administrative system, foot-dragging on the implementation of laws and reform projects and an inadequate vocational training system have prevented across-the-board economic development and sustainable poverty reduction.

In the field of sustainable economic development, German development cooperation is supporting the Georgian government's development programmes. Coordinated programmes are to develop the financial sector and the private sector in particular. The programmes will focus on micro, small and medium-sized enterprises in the private sector. In order to mobilise their potential to retain and create jobs, the financial, legal, administrative and societal frameworks must be improved.

Experience shows that women are more often affected by unemployment and that they often earn below average wages, so they stand to benefit disproportionately from the programmes of Georgian-German development cooperation in this sector.

Energy and nature conservation

With German support, the efficiency of the Georgian energy sector has been raised markedly in recent years. Only a few years ago, widespread power cuts were the order of the day. This was due to poor maintenance, inadequate investment and unsatisfactory operation. "Home-grown" problems such as inefficient management of energy utilities, corruption and theft of electricity have been lessened and in some cases eradicated in recent years. A market economy system, with cost-covering electricity prices, has been introduced. At the same time weaknesses caused by the system have been reduced to the extent that nowadays power cuts are a rare occurrence. German development cooperation is now focused on the promotion of renewable energies and boosting energy efficiency. Georgia has major potential in the fields of hydropower and geothermal power. Georgia has realistic prospects of becoming a net exporter of renewable energy (especially hydroelectric power). The utilisation of renewable energies helps protect the climate and natural resources.

Cooperation in the field of nature conservation and the promotion of biodiversity also has a high priority. With German assistance, action plans for nature reserves are being devised and small investments undertaken.

Municipal development and democracy

Ratification of a treaty in connection with the reform of the legislative and judiciary system in Georgia. Copyright: Michael WiederholdIn Georgia the development of market-based and democratic structures has advanced significantly in recent years. German development cooperation seeks to help accelerate this process, both at national and local level. BMZ and its implementing organisations along with the various political foundations are particularly active in the following areas:

  • Reform of the legal and judicial system

  • Support for the administration

  • Decentralisation and municipal development (including drinking water supply)

  • Promotion of civil society

  • Peaceful conflict resolution at local level

Clearly defined objectives exist. The aim is for Georgian decision-makers to take a more pro-development stance. The existing legal order is to be implemented in practice and the administration is to become more transparent and more efficient. Another goal is to strengthen democratic institutions at municipal and district level and to bring local government closer to the people. Special emphasis is placed on the inclusion of ethnic minorities and on the promotion of women's participation. The envisaged improvements in this priority area are considered a major precondition for the development of Georgia’s democracy and economy.

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