Georgia’s population has high expectations, which the government is striving to meet

Positioned at the crossroads of Europe and Asia, where Caspian oil and western goods flow increasingly between east and west, the Caucasian state of Georgia is itself in transition. A new generation of leaders—young, dynamic, and western oriented—is steering the former Soviet republic towards a more prosperous future after a bloodless revolution that swept the old guard out of office towards the end of last year.

Georgia once enjoyed one of the highest standards of living in the former Soviet Union, but suffered a dramatic decline into poverty under the former administration led by Eduard Shevardnadze, the former Soviet Foreign Minister. Things became so bad there was a mass exodus, with one in five Georgians leaving the country.

“Basic institutions were failing, and corruption was institutionalized,” says the new President, Mikhail Saakashvili. “That was how the country was run.”

Mr. Saakashvili has an indisputable electoral mandate for the reforms with which he and the government are seeking to transform governance and the economy—in January, he won 97 percent of the vote in the presidential election.

The government knows that it has much to do and that the expectations of the Georgian people are high, but it has got off to a confident start. “We are very different from the previous administration,” says the President. “We are the first CIS country to have had a genuinely post-communist government. We have a much fresher look. Almost the whole political class comes from western educational institutions, and this is making a huge difference; we have experience in the modern management mentality.

“The new approach is, in any case, the only way forward,” he adds. “We need to succeed because there is no other option for this country at the moment.”

Priority is being given to fighting poverty, overhauling the legal system, boosting development outside the capital, Tblisi, and attracting much needed foreign investment. Sweeping reforms are being introduced at every level of governance, and clear progress has already been made. The crime rate has been cut dramatically, and state revenues from tax collection have increased notably.
An aggressive privatization policy is being initiated, with no sector of the economy excluded. Major assets expected to go up for sale include the important seaports of Batumi and Poti (see article below), and all the country’s airports.

Mr. Saakashvili says, “We want to set the standards for reforms. We are dramatically reforming government structures, downsizing bureaucracy, reducing government functions, increasing salaries for government officials and putting an end to corruption.”

Under the former regime, corruption—official and unofficial—was a major deterrent to investment. Foreign capital is required to help Georgia develop the economy and make urgently needed improvements to its infrastructure, and the government is working hard to restore investor confidence.

MIKHAIL SAAKASHVILI President of Georgia

NINO BURJANADZE Speaker of Parliament

Mr. Saakashvili enumerates Georgia’s advantages. “We are becoming part of the European environment and we have competitive labor costs. We have access to the neighboring markets of Russia, Ukraine, the Middle East, Iran, and Turkey, and serious investments in terms of energy projects and pipeline construction."

Georgia’s economy has proved resilient. According to the State Department of Statistics, gross domestic product rose by 11.1 percent last year, led by activity in the construction and agricultural sectors, and the economy looks well set to comfortably exceed the 6 percent target for this year.

The country enjoys some of the highest standards in the CIS in terms of media freedom. It has a vibrant civil society, and its government institutions have become more transparent. Mr. Saakashvili promises that following the introduction of the new tax code the country will have the lowest tax tariffs in the region.

In the former Soviet Union, Georgia’s ski resorts and spa areas made it the main tourist destination for eastern Europeans and for other Soviet states, attracting up to 5 million tourists a year. “There are fantastic possibilities for developing a very targeted and high quality tourism,” says Mr. Saakashvili.

Irakli Managadze, President of the National Bank of Georgia, praises the new government’s approach to fiscal and monetary policy. “If you compare the state of fiscal affairs immediately after the revolution with what it is now, you get a very impressive picture of adjustment and improvement. Pensions and salaries are paid on time, and the government has started to pay the arrears accumulated previously.”

Discussions are under way with the international creditors of the Paris Club about Georgia’s significant external debt burden, which needs to be restructured. "If we succeed in restructuring the foreign debt this will facilitate a steady economic growth and build investor confidence,” says Mr. Managadze.

He adds that, despite the difficulties of recent years, Georgia has a firm foundation for solid economic growth. “We have maintained a stable currency and a low level of inflation, and we have transformed the banking sector.”

Six years ago Georgia had 57 banks. Since then the number has more than halved, resulting in a leaner, more stable sector that has enjoyed impressive growth, with assets rising by 20 percent in recent years. Minimal capital requirements have been increased in line with EU standards.

In terms of foreign policy, Prime Minister Zurab Zhvania says Georgia regards the United States as a vital strategic partner, and that integration into NATO and European Union is the country’s goal. “We are strengthening relations with NATO. We believe that the most stable arrangement for the security of our country is to be found within the Euro-Atlantic alliance.”

Nino Burjanadze, Speaker of the Georgian Parliament, accepts that it will take time. She says, “The main priority for Georgia is to build good relations with neighboring countries, and to become a member of NATO and the EU. This is not in prospect in the short term, but we are taking steps in this direction.”

Georgia has a partnership and cooperation agreement with the EU, and participates in NATO's Partnership for Peace program. The EU, which sees Georgia as a key route for transporting Caspian Sea oil to the west, has been steadily strengthening relations. Meanwhile, steps are being taken in Georgia to ensure that all sectors of government are harmonizing their practices, standards and regulation with the EU.