Promoting Growth and Prosperity for Georgia’s Post-Crisis Economic Recovery

Challenge

Georgia enjoyed robust growth rates between 2004 and 2008, which were interrupted by the 2008 global financial crisis. The crisis and the post-crisis recovery revealed fundamental weaknesses in the country’s growth trajectory, which was demand led and relied mainly on high capital inflows and fiscal stimulus in the form of high capital spending, resulting in little net job growth. Total Factor Productivity (TFP) gains were limited to the non-tradables sector, and unemployment remained high and persistent.

Solution

The CEM recommended a focus on education and skills, domestic resource mobilization built on macroeconomic fundamentals, specifically on fiscal and external sustainability, and sound prudential regulation to support systemic credibility and strengthened access to finance. In particular, the CEM recommended policies targeted at incentivizing resource shifts to more productive and tradable sectors to promote growth and generate employment opportunities. The analysis was conducted in close collaboration with Government counterparts. The preparation process included policy notes, support-the-growth dialogue, and technical presentations. In addition, the team also organized a presentation for a wide range of stakeholders, such as civil society organizations, donors, and the private sector. 

Results

The Government’s strategy relied heavily on the CEM, which also informed World Bank lending, as well as technical assistance on pension reform and deposit insurance. Specific recommendations included:

• Shift to lower growth of current expenditures, with expenditure consolidation in 2013–15 from an equal mix of current and capital expenditures.
• Improve incentives for private retirement savings by setting growth expectations in the basic pension benefit at sustainable levels, introducing an opt-out supplementary savings scheme, and developing capital markets to widen availability of financial instruments for long-term saving.
• Put in place macro prudential regulation, such as capital/liquidity requirements, asset concentration/credit growth limits, and loan eligibility criteria, to curb unsustainable credit-fueled consumption booms.
• Reduce high borrowing costs and lari bank spreads by lowering nonperforming loans, inducing bank entry and competition, taming inflationary expectations, and improving confidence in the banking sector and the local currency.
• Improve electricity pricing mechanisms through more transparent and independent regulation.
• Strengthen job matching services to reduce search costs and alleviate skills mismatches. Equip workers with more relevant skills by strengthening the vocational education system (especially in the apparel and wine sectors) and improving overall education quality.
• Pursue trade-related reforms to facilitate exports. Improve trade and logistics infrastructure to levels of leading middle-income countries and improve internal infrastructure to better connect secondary and rural areas to international markets.
• Support targeted investment promotion and marketing to attract foreign direct.

Bank Group Contribution

This is an Economic and Sector Work (ESW) fully funded by the World Bank budget. The cumulative amount of Bank resources spent was US$285,000.

Partners

The Government of Georgia has been the key partner in identifying the main constraints to growth. The Ministry of Finance and Geostat provided highly valuable support to the team to collect, reconcile, and analyze available information. The World Bank benefited significantly from the cooperation with other partners and donors, in particular, the U.S. Agency for International Development’s (USAID) Economic Prosperity Initiative project and the International Monetary Fund (IMF), as well as with representatives of the private sector (textile industry, wine producers, and other small and medium-sized enterprises [SMEs]), which readily participated in the various interviews and discussions. 

Moving Forward

The key messages of the CEM translated into several policy notes for the Government and were used to help formulate future policy directions. The set of policy notes triggered a high-level policy forum (in February 2014) attended by the prime minister and other key ministers. The FY14–17 Country Partnership Strategy was developed in line with the main recommendations of the CEM. Equipping workers with more relevant skills by strengthening the vocational education system and improving overall education quality has also become an integral part of the Government’s strategy. The Ministry of Education is in the process of developing a comprehensive education strategy with technical assistance support from the World Bank. The Government also approved a vocational education strategy in 2013.

Beneficiaries

The immediate beneficiary of the report is the Government of Georgia, which has been using the report as a basis for policy decisions. In the medium and long run, the entire population of the country is expected to benefit from policies expected to generate more jobs, improve the quality of workers’ skills and productivity, reduce poverty, and encourage integration into the global markets. The ultimate goal of all prioritized public policies is to benefit the most vulnerable segments of the population and lift them from poverty.