Georgia will need New Policies to Support Rapid Economic Growth

July 17, 2013

Tbilisi, July 17, 2013 – Georgia will need new policies to support rapid economic growth over the next decade and beyond, according to the Country Economic Memorandum (CEM) report titled Georgia Rising: Sustaining Rapid Economic Growth presented by the World Bank today.  The report points out that new policies will be needed to support both high investment, financed increasingly from national savings, as well as higher productivity and competitiveness of exports and tradable goods.

This Country Economic Memorandum is intended to contribute to policy dialogue on the options to sustain strong economic growth with job creation, reduced poverty and shared prosperity as key objectives,” said Henry Kerali, World Bank Regional Director for the South Caucasus.  “In preparing the report, the Bank team benefited from consultations with the government, independent experts, and international development partners.  We believe that this report comes at a critical juncture as Georgia maps out its medium term strategy.

Economic growth in Georgia was strong averaging 6.1 percent per year during 2004-2012 as structural reforms and a favorable global economy led to large foreign direct investment (FDI) inflows and expansion in the services sectors.  However, unemployment and poverty remained relatively high with a large current account deficit and economic expansion primarily driven by the non-tradable sectors. This raises concerns about the sustainability of growth going forward.

New policies will be needed to increase employment, reduce poverty and narrow the current account deficit by raising national savings to finance higher investment and better targeting of current expenditures,” said Faruk Khan, World Bank Senior Economist and lead author of the report.  “New policies will also be needed to stimulate productivity growth at the firm level, upgrade education and skills to better employ labor resources, and enhance competitiveness of exports and tradables.

The CEM report shows that supporting future GDP growth of 5 percent per year during 2013-2017 will require investment of more than 30 percent of GDP and productivity growth of more than 3 percent per year.  The report examines how strong and stable economic growth could be achieved for an extended period of time in order to increase employment, reduce poverty, and boost shared prosperity.  This will require new policies to raise national savings, boost firm productivity, better deploy labor resources, and enhance export competitiveness.

In order to raise national savings, public saving could be increased by shifting the fiscal framework to control current expenditures, and private saving could be bolstered through macro-prudential regulations and a package of measures particularly to encourage saving for retirement.

Stimulating firm productivity will require a range of constraints to be addressed, including streamlining the complexity of closing a business, reducing high borrowing costs, and reducing input costs, such as electricity pricing.

Options to boost job creation and more productively deploy labor resources include upgrading overall education quality, strengthening vocational education systems to improve worker skills, and developing job matching services to alleviate skills mismatches and reduce search costs.

Enhancing competitiveness of exports will require addressing any overvaluation of the exchange rate, pursuing trade-related reforms to enhance access to European Union and international markets, and upgrading logistics and internal infrastructure.

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