Georgia - A blueprint for reforms

The collapse of the Soviet Union in late 1991 and the attendant disruption in institutions that managed the economy until then has forced the Georgian economy into a tailspin. Output contracted by a cumulative 40 percent during 1990 and 1991 and the net material product declined by another 45-46 percent in 1992. Inflation accelerated to more than 1500 percent by end-1992. It is in these difficult conditions that Georgia is attempting to establish the foundations of a market economy. The task is especially daunting because Georgia started the transformation virtually from scratch: existing institutions are ill-suited to a market based economy, and there is a dearth of people who know and understand how the transition to a market economy is to be managed. Yet, unlike many of the other countries of the former Soviet Union, Georgia has a long tradition of enterpreneurship which should serve it well during the transition. The report states that the medium term prospects for the economy are good, based on robust growth in exports. There is a solid potential in agriculture, and services are likely to develop strongly. With appropriate macroeconomic stabilization policies and structural reforms, this potential can be achieved. However, in the short term the decline in output can only be moderated, not reversed. Macroeconomic stabilization will require maintaining tight fiscal, credit and income policies. Reforms to restore macroeconomic stability include first, measures to progressively liberalize markets for goods and factors of production and so reduce government interventions in resource allocation. Continued government intervention in setting process and profit margins, controlling imports, directing credits, etc. distort market signals and lead to the mis-allocation of resources. Systemic reforms are required to encourage and enable enterprises, banks and households to respond flexibly and efficiently to market signals and opportunities. Changes in the ownership and management structure in enterprises and banks is a key aspect of these reforms. In their absence, there is no assurance that agents will not react perversely to market signals. Finally, the report shows that it is necessary to provide an affordable social safety net for those that are poor and for those hurt by the transition. If these measures are not in place, the sustainability of the reforms could be jeopardized.