A silver lining to Georgia's war

By bne IntelliNews May 28, 2009

Ben Aris in London -

The Russo-Georgian eight-day war in August last year has turned out to have an economic silver lining. The small, verdant country in the Caucasus had already been in crisis mode for two months when US investment bank Lehman Brothers collapsed last year. But what has made all the difference is the $4.5bn that Georgia has been promised by the international community to help pay for the war damage.

Prime Minister Nika Gilauri was almost crowing with pride during his country's session at the recent European Bank for Reconstruction and Development annual general meeting in London. It was an impressive presentation that catalogued an extraordinary reform effort over the last five years.

Not a single bank has collapsed in Georgia, indeed not a single one even asked for the state's help. Growth has collapsed elsewhere, but the economy will be one of the very few in the region that will probably turn in positive growth this. The country's only real economic headache is the large current account deficit. Until this year, the inflow of foreign investments had always been enough to comfortably finance the deficit, but while investment has fallen, Gilauri says that the donor money will easy cover the shortfall: $1.7bn had already been received by the end of May and another $1.8bn was on its way, accounting for three-quarters of all the money promised. "And there is another $1bn promised by the USA. Since the change of administration in Washington, the new administration is even more supportive of us than the old one and the bill to approve this money is in Congress now," said Gilauri.

And the money is unlikely to be wasted. Gilauri said all the donor money would go into targeted investment projects that are designed to attract more investment. For example, part of the donor money will be spent to build a new cross-country 500-megawatt power cable that should encourage Turkish companies to build new hydropower plants in the west of the country.

In most countries in the region, investors would raise an eyebrow to any claim that the money will be efficiently spent, but not in Georgia. It has been in the top five of the World Bank's list of fastest reforming countries in the world for the last five years and also tops its "Doing Business" survey for the CIS. "The biggest reform success is the almost complete eradication of corruption. Business people in Georgia face no corruption in their day-to-day lives," Gilauri claims.

That's a big claim - especially for anyone that tried to do business in Georgia in the 1990s. But in a recent IFC corruption survey, respondents were asked if they think they need to pay a bribe to do business in CIS countries. Those answering "yes" to this question made up 32% of respondents in Eastern Europe and 22% in the Caucasus, but only 4% in Georgia.


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A silver lining to Georgia's war

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