1.1.1. Macroeconomic Environment

1) The first years of independence were very difficult. Traditional economic ties were disrupted and markets lost. There was no national currency, the monetary system and the legislative framework for a market economy. That made it impossible to manage economic and political processes on a consistent and systemic basis. Domestic political controversy, separatism, civil wars and a subsequent strong criminal activity had a ruinous effect on the country’s economy. As a result of the conflicts in Abkhazia and Tskhinvali region, 300 thousand people became internally displaced persons. This brought a particularly heavy burden on the budget. The economic downturn reached a critical point in 1993–1994. Industrial activity dropped five times from its level in 1990. The social situation worsened drastically and many faced the danger of starvation.

2) In the beginning of 1994, the government launched a macroeconomic stabilisation programme, supported by international financial organizations. The main purpose was to stabilise the monetary and fiscal systems, start a process of privatization, reform the education, health care and social systems, and liberalise prices and trade.

3) To regulate the money supply, the amount of government credit was strictly defined. This included the imposition of ceilings for domestic and international assets of the National Bank of Georgia (NBG). The asset structure of the NBG improved significantly. To control money supply, budget and international reserves control was transferred from the Ministry of Finance (MoF) to the NBG. These measures allowed the NBG to regulate the money supply in circulation.

4) The privatization of state banks was launched to strengthen the banking system and secure the interests of creditors. Licensing procedures became tighter. Banks were subject to liquidation or mergers, etc. Commercial banks had to have a minimum authorized capital. These measures helped to bring liquidity into the banking system, strengthened the financial situation of a number of banks, and brought about a significant improvement in monetary and foreign exchange regulation.

5) Through the adoption of new laws, the normative acts regulating budget and tax issues improved. Budget revenue increased and there was enhanced control over public expenditure with improved accounting procedures. From 1995, with the degree of macroeconomic stability achieved it became possible to adopt an annual state Budget.

6) As a result of changes in the structure of public expenditure, direct subsidies to state enterprises were minimised. At the same time there were increases in social expenditure items and the government started the process of price liberalisation.

7) Structural reform was also carried out. Prices became free from state regulation. Citizens and enterprises were granted unimpeded rights to engage in trade or intermediary activities. This promoted the establishment of a competitive market, revived trade and created new employment possibilities. Business registration procedures were simplified. Monopolistic enterprises inherited from the Soviet system were dismantled. Mass-privatisation and the first stage of land reform were launched.

8) All these measures produced macroeconomic stability. In 1995 the government introduced a new national currency, the Lari (GEL). Hyperinflation was defeated. In 1993 the annual inflation rate was above 13,000%. By 1997 annual inflation had come down to 7.3%. Macroeconomic stability was accompanied with economic growth. Average annual GDP growth between 1996 and 1997 was 11–12%. Budget revenue mobilized also increased. In 1995, the share of the budget deficit towards GDP decreased by three times compared to figures from previous years.

9) Despite these trends, the budgetary process still lacks efficiency, transparency and fairness in the distribution of resources. At the same time, no significant progress has been achieved in strengthening government finances. The share of state revenues¹ in relation to GDP is still very low. Total revenue in relation to GDP constituted 10.6% in 1996. In 2001 it had risen to 14.6%.

10) The budget deficit was reduced from 7.1% of GDP in 1996 to 1.7% in 2001.

11) Despite positive export growth during previous years (US$309 million in 1996 and US$496.2 million in 2001), imports for the same period (US$897.5 million in 1996 and US$ 1045.6 million in 2001) exceeded exports.

12) The financial crisis in Russia of 1998 adversely affected Georgia’s economy. A worsening of balance of payments condition caused a devaluation of the Lari. The NBG stopped interventions in the exchange market and allowed the currency to float freely. As a result of the crisis the macroeconomic situation deteriorated drastically. GDP growth rate stalled and constituted 2.9% in 1998 as compared to 10.7% in 1997. The annual inflation rate in 1998 was 10.7%, compared to 7.3% in 1997.

13) In 2002, the volume of foreign debt equalled US$1,592.64 million. This constituted 47.42% of the GDP. US$ 771.445 million was payable to international financial organizations and US$ 757.122 million to bi-lateral creditors. The largest creditors are the IMF and World Bank. Almost 64% of bi-lateral debt is with Turkmenistan and Russia. In 2001, Georgia needed to repay a significant portion of its foreign debt. This would have undermined credit sustainability. Agreements reached with bi-lateral creditors in Paris Club significantly assisted debt sustainability. However, foreign debt servicing remains a major issue and there will need to be continued cooperation with the Paris Club to restructure debt on concessional terms.

14) Total domestic debt was GEL 1,484.3 million in 2002. More than half of this debt, GEL 767 million represented government arrears to the NBG.

15) During 1999–2002, the Government of Georgia was trying to overcome the outcomes of the crisis and preserve macroeconomic stability. In 1999 the GDP growth rate was 3% and in 2000 it was only 1.9%. The GDP growth rate was better in 2001 - at 4.5% and in 2002 it was at 5.4%. In 2001, the inflation rate of 3.4% was the lowest indicator in the history of the independent Georgia and 5.4% in 2002.

16) Macroeconomic analysis demonstrates that the government successfully discharged one of its most important economic functions. It ensured price stability and moderate inflation rates. Comparative stability of the macroeconomic environment is a significant achievement. However, fast and sustainable economic growth and a substantial improvement in social conditions and the fiscal system should be attained.

1.1.2. Structural and Institutional Reform

17) Macroeconomic stability is one of the most important pre-conditions for economic development. However, its sustainability and growth depend on the implementation of appropriate structural reforms.

18) Privatization is an essential component of structural reform. Privatization started in 1992 preceded by the preparation and adoption of relevant legislation and turning existing industrial enterprises into joint stock companies (JSCs). Controlling blocks of shares of more than 1000 JSCs were transferred to private owners. The privatization of trade and services has been completed. Overall, more than 15,000 enterprises were privatized between 1993 and 2002. This has had a major impact on restructuring the economy. However, the mere fact of privatisation has not produced the desired outcome. A number of large-scale enterprises continue to be state owned. Management in these companies often fail to run them efficiently or make profits in terms of their industrial potential.

19) Mechanisms are underway to assign ownership rights on natural resources such as land and forest cadastre. Without proper accounting the value of the resources decreases. Due to unreliable information and insufficient safeguarding of property rights, assets are not capitalized. This results in their inefficient use.

20) As a result of structural reorganization, state regulation of the economy and management of state owned enterprises has been separated. The process of transforming monopolistic entities and establishing regulatory institutions is ongoing. The importance of the State Anti-Monopoly Service is increasing.

21) Another important component of structural reform is to create a sound tax environment. Despite numerous attempts, the tax system still fails to act, as a stimulating instrument for business and economic development. There is no sense of partnership between the taxpayer and the government.

22) Exports are zero-rated. As goods leave Georgian territory, the VAT paid on production is supposed to be refunded. One of the biggest shortcomings of the existing tax administration is the non-refund of VAT to exporters. This reduces net exports and GDP growth.

23) There are many problems in imports. To evade customs duties, the value of imported goods is reduced artificially or they are smuggled. Official information about exports and imports is not a realistic picture of foreign trade. The country’s borders remain vulnerable and porous. Customs administration was set up from scratch. Despite numerous reform efforts, customs administration does not function properly. Corruption is high. The need for further institutional reform is evident.

24) Certification and standardization of the goods and services is given important to combat counterfeit products and strengthen export potential. Reform in this area has started. Simplifying the certification process and reducing the number of goods and services subject to mandatory certification are significant anti-corruption measures.

25) Ongoing reform in the licensing system seeks to improve the structural environment. Surveys revealed defects in the existing system. A law “On Licensing and Issuance of Permissions for Entrepreneurial Activity” has been adopted that seeks to improve and codify those areas subject to licensing.

26) Much attention has been placed on improving legislation. There has been significant reform in the judiciary. However, illegal activity is still high. There is some sense in the fact that some laws do not fit with the existing situation and there remains a lack of competency within law-enforcement agencies and in the legal system. Corruption hampers the efficient operation of government institutions, business development and generates an unfavourable social and economic climate.

1.1.3. Economic Sectors

1.1.4. Households

68) The household is a socio-economic unit. Its members share common rules of living and eating in a single lodging, are interconnected by a common budget (part of the budget), as well as by kin or non-kin relations. The household represents the basic institutional unit in the country and is the main producer and consumer of resources.

69) Household income levels define the socio-economic standing of households and the country’s overall development level. Nominal income has grown in recent years. In 2002 it was 30.6% more than the figure for 1996. However, this growth is not sufficient to substantially reduce poverty. The main, albeit not exclusive, sources of household incomes are, hired labour, non-agricultural self-employment, land usage (agricultural self-employment) and government and private transfers (pensions and benefits). Household income is generated from simultaneous sources that appear to be a response to the fragile economic environment. Only 20% of household income is generated from a single source. Roughly a half of households have three or more sources of income.

70) The average monthly salary in terms of spending is GEL104.1 (85.6% of the official minimum subsistence level). The average salary per month constitutes GEL113.5 (93.3% of the official minimum subsistence level). The minimum salary is low and is 40% of the extreme minimum subsistence level. The majority of the population is self-employed, mainly in the agricultural sector. Employment is increasing in the private sector and in agriculture but is decreasing in non-agricultural areas.

71) Land is an important source of income. Agricultural production constitutes a third of household incomes. However, the share of agricultural products sold at the market is low. Production is mainly for local consumption. A large number of households receive a certain portion of income in food.

72) State transfers do not constitute a substantial share of household income. However, many families receive some benefits, mostly the pension, from the state. In 2001, 60% of households received some type of state benefit. The volume of private transfers is equal to state transfers, but is less common. One third of households receive private assistance in this form. As a result of economic emigration, remittances back home constitute a considerable source of income.

73) About 40% of households took loans during 2002 and 80% have not yet repaid the debt in full. Low credit sustainability is another factor in the acute problem of poverty.

74) Household expenditure is increasing. In 2002, total average monthly expenditure per household was GEL325.9 (consumption costs—GEL 276). It is approximately GEL87.4 per month per capita. The main part of household resources is spent on food. The share of pecuniary and non-pecuniary food expenses constitutes 50% of he total expenditure. The share of so-called non-pecuniary costs is about 18% of the total expenditure. The socio-economic standing of households depends considerably on the harvest from their own land.

75) Average monthly income of households (I quintile) with lowest income level is GEL30.8. Average monthly income of richest households (V quintile) is GEL526.5. This is, seventeen times more (the so-called S/80/20 indicator). Distribution of expenditure is rather polarized among quintile groups. Total expenditure (both pecuniary and non-pecuniary) of a household from the fifth quintile group is 9.6 times more than similar expenditure of the fourth quintile group. Food expenses constitute the largest portion of household costs. The share is much higher in households with the lowest level of expenditure – 50%, while the same indicator is 33% in the fifth quintile group. The share of food expenses in rural areas is 25.4% and 37.8% in urban places. The share of the expenditure on fuel and electricity is 5.6% and varies from 6.9% in the first quintile group to 4.9% in the fifth group.

76) The figures indicate inequality of socio-economic standing of household. Income distribution is more polarized than consumption. In 2002, the Gini index according to total revenues is 0.47 and has a downward tendency. Inequality is comparatively low in consumption. According to consumption, the Gini index is 0.35, a more equal distribution. The Gini index according to consumption has become somewhat stable recently.

77) Household expenses on human capital investment (development) are about 6.2%. Educational expenditure of the fifth quintile group is 45 times more than in the first quintile group. The portion of the poor who have had a medical examination is 2.4 times lower compared to the non-poor. Urban households spend 3 times more on education than rural households. Human capital investment by poor households is low.

78) Personal consumption depends on income and is difficult to account for in present conditions. Pecuniary income constitutes a large part of total income. Average monthly pecuniary income was GEL163.7 million in 2002, (GEL41 per capita). Total average expenditure per month was GEL276.6 (GEL 69.3 per capita). Total average expenditure per month was GEL 346.7 million, i.e. registered income cover only one third of expenditure – pecuniary consumption costs were GEL216.7 million per month.

79) Non-pecuniary income constitutes 33% of pecuniary income and 23% of total pecuniary and non-pecuniary funds. Of incomes the largest are from hired labour (41% of pecuniary income), self-employment (19%), income from the sale of agricultural products (16%) and pensions and benefits (9%). The share of income of property is low (0.8% of total income). Transfers from abroad (4.4% of the total) and money received from family members and friends (5.0%) remain large in pecuniary terms. The share of sold property and borrowed money or savings is high in pecuniary expenditure (12.5% of pecuniary funds).

80) A substantial source of income in poor households (30% of total income) derives from so called inactive income such as from property sales and transfers. For those above the poverty line this type of income was 20% less than for those below. The share in income of state assistance in the form of pensions and other benefits was 28% in poor households an indication that such households depend considerably upon state assistance.

81) Unemployment is a very important factor of extreme poverty. No member of a family is employed in 40% of households below the poverty line. In 45% of poor households, one member of the family has to support two or more family members.

1.1.5. Poverty and Vulnerability

82) Poverty is defined as the standing of a human being or family when it has no capability to satisfy basic needs (food, shelter, physical safety, basic education, personal growth, health, communication) due to low income or the non-availability of money.

83) In Georgia poverty indicators are calculated according to household costs. To calculate poverty lines the method of food energy is applied. Two poverty lines are used for evaluation:

• Official minimum subsistence– this is GEL124–128 per month for an adult of working age;

• Extreme poverty line –GEL 58–63 per month for an adult of working age.

84) In 2002, the level of poverty in respect to the official minimum subsistence was approximately 52%. In 1994 this level was 80% and in 1995 – 60%. The lowest level of poverty was in 1997 – about 46%. In recent years, the level of poverty has stabilised at around 51%–52%.

85) In 2002, 15% of the population lived in extreme poverty. This figure decreased between 1999 and 2001.

86) The depth of poverty was calculated for the first time in 1996. Between 1996 and 2002 the poverty depth indicator in respect to the official minimum subsistence was lowest in 1997 constituting 17.3%. Subsequently the figure has fluctuated between 19% and 20%. With respect to extreme poverty the figure was highest in 1996 at 14.5%. Subsequently it was 8.5%–9.5%.

87) The short-term strategy for poverty reduction should preferably focus on the lower poverty line. At least a third of the households were below the poverty line during 2002. Almost one third of households are close to extreme poverty.

88) All types of households are not captured by poverty equally. However, there are some shared characteristics of those in poverty. These characteristics are:

• Households with unemployed members –one third of households in extreme poverty have no employed member;

• Households with comparatively low levels of education – the one third of households in extreme poverty have average or lower education levels.

• Households without working capacity – around 20% of households in extreme poverty are comprised of members without working capacity.

89) Unemployment is one of the most important factors that defines the poverty level. The risk of households to fall below the poverty line increases according to the number of unemployed members. The poverty level is almost three times more than the average in those households where all members are unemployed.

90) Urban and rural poverty differs. Urban poverty is related to insufficient food supply, which is viewed as an indicator of severe and deep poverty. Rural households consume the food they produce. In rural areas the major issues are a lack of financial resources and undeveloped infrastructure. The latter reduces accessibility to major services.

91) While urban poverty is deeper and more severe, accessibility to education and health care services is better. This enhances employment prospects and improves economic standing.

92) The rural poverty level is always lower urban levels but is no less acute. Living above the poverty line in rural areas is assisted by the availability of one’s own harvest, live-stock and poultry products. This depends considerably on climatic conditions. For instance, droughts in 1998 and 2000 increased rural poverty. The major resource that keeps rural populations above the poverty line is land.

93) There is little prospect to reduce rural poverty unless existing conditions are changed. Even if poverty is reduced with a good harvest, this will not be stable and will continue only until the next drought, hail or other natural calamity.

94) Several factors affecting poverty can be identified. These factors include:

• Employment;

• Unemployment;

• Age;

• Shock;

• Infrastructure.

95) If one person in a household finds employment household consumption increases by about 20%. Similarly if a household member becomes unemployed consumption decreases by 20%. The age structure of a household has a close relation to poverty. This factor is particularly significant in urban areas where the existence of pensioners living alone decreases the consumption volume calculated according to equivalent adults by almost 30%. The effect of this factor is also significant in rural areas but less than urban areas. The households composed of members of non-working age encounter severe problems in urban areas and this fact reduces consumption by about 25%. Households find it very difficult to withstand external crisis. The Russian financial crisis of 1998 and droughts in 2000 are evidence of this. The poor condition of infrastructure is also an important problem. This is more severe in rural areas. Rural households have less access to education and healthcare. The energy crisis and information vacuum aggravates the problem further especially in remote villages. The Low quality of roads is also a large problem.

96) There are two types of poverty in time terms:

• Chronic

• Transient

97) Poverty-affected households can be classified into two groups:

• Those unable to overcome poverty due to a lack of necessary human and material resources, mainly lonely pensioners and families comprised of members of non-working age. Their only method of moving out of poverty is through state assistance.

• Those able to overcome poverty due to the availability of necessary human resources, mainly households with unemployed members or those comprised of members on low incomes. In this case the most effective way is to create new jobs.

98) The factors affecting poverty are of two types:

• Short-term factors – these are transient and affect only for a certain period of time (e.g. shocks, short-term unemployment).

• Long-term factors – of a continuous character, with the possibility to be revealed in the future. One of the most important of these is access to education. Prolonged unemployment, associated with losing skills, can also be considered as a factor.

99) The correlation between vulnerability, poverty and other social characteristics helps to identify vulnerable groups and high-risk groups. Single pensioners are at the highest risk. The level of extreme poverty in this group is high—up to 25%. The poverty level is persistently high in one member families, almost 70% of which are of pension age. Pensions or benefits constitute only 13.5% of income for single pensioners and private transfers constitute 11.9%. The poverty level in this group is twice high in urban to rural areas.

100) The role of dependence is crucial. Poverty risk rapidly increases in households that have three or more children. Poverty in families with many children is more distinctive when there is only one breadwinner in the household. This can be partly explained by a can reduction of actual income and also by the lack of state benefits for children. At present children of school age head the list of the poorest age groups.

101) In terms of integration into the labour market internally displaced persons (IDPs) face particular difficulties. The unemployment level of individually accommodated IDPs is twice as high as the local population. Collectively accommodated IDPs unemployment is three times higher than the local population. About 20% of internally displaced persons declare that they are isolated from the local population. They do not have information about vacancies and connections to get jobs. Employment prospects are low paid and unreliable.

102) Regional poverty indicators are heterogeneous. The tendency is more homogeneous in Tbilisi, Shida Kartli and Adjara, Samegrelo and Imereti. The poverty level is higher in Imereti than Samegrelo. The poverty level is more or less the same in Samtskhe-Javakheti and Kakheti, Kvemo Kartli and Guria. The poverty line indicator shows different tendencies in different regions. Poverty levels are increasing in Kakheti and Samtskhe-Javakheti declining in Tbilisi and Imereti.

103) As central government capacity is limited, policy aimed at making the regions more equal is difficult.

1.1.6. Social Security

104) Social problems, including poverty, are a consequence of the degree of social services that exist. The biggest problem lies in lack of funds. Public expenditure on education and social protection (pensions and social allowances) constitute one third of the budget, which is about GEL90 per capita per annum.

105) The social protection system fails to manage social risk adequately. This is one side of the problem. The imbalance between social taxes and proceeds suppresses motivation and force people to move into the informal sector of the economy. This adversely affects economic development and removes the foundation to set up a reliable social safety system.

106) Three main problems can be distinguished: a) Insufficient the tax base, resulting from low wages and the numbers of people in the formal sector; b) demographic change—ageing population; c) Poorly targeted benefits.

107) The low effect of social protection is a very important problem. State pensions, stipends, and benefits constituted 3.8% of total household income in 2002. The share of private money transfers (from relatives and friends) was 10% in 2002. About 10% of food inflow into poor households is free from private sources. The role of the informal non-government social safety network is very significant. 60% of the poor do not receive private assistance, while the non-poor receive 85%. It can be assumed that families that receive private assistance become ‘non-poor’ due to this help.

108) In 2002 the social tax base constituted up to 7% of GDP. State assistance is not on the basis of assessment of their material standing—need but on the basis of attribution to certain categories (blind people, internally displaced persons, others). The level of targeting is poor. In 2002, state allowances reduced the poverty depth by only 3.6%.

109) Social taxes were 2.7% of GDP by 2003. There is a serious crisis in the pension system. Pension arrears have gone up. They amounted to GEL116 million by 2003. This is pensions not paid for over six months. There were 854,000 pensioners (recipients of social and insurance pensions). On top of this there are 12,000 law enforcement pensioners and 1,200 regressive pensioners. There are total of 879,200 pensioners that is 19.5% 0f the total population. The minimum pension is very low—GEL14. In 1996, the average pension in respect to income was 12% per capita. This indicator decreased further and now equals 8%–9%. Paying pensions on the principle of “solidarity” is complicated due to the demographic structure of the population as a whole. Georgia has a relatively large number of people of pensionable age compared to countries with similar income levels. The number of contributors to the pension system has halved in the last decade. The dependency ratio (proportion of employed people to pensioners) has dropped down from 2.8 in 1990 to 0.8 in 2002.

1.1.7. Human Capital

110) One of the most important components of human capital is health. This is affected by life style and access to and the quality of medical services. The current health condition in Georgia is alarming.

111) In 2002, the average life expectancy was 76.1 years at birth, 73.7 years—for male, 78.7—for female². The mortality rate of infants up to one year per 1000 live births during 1996-2002 varied from 27.8 to 20. Between 1993 and 2002, maternal mortality varied from 32 (in 1993) to 70 (in 1997) and 58.7 (in 2002). From 1990 the mortality rate caused by cardiovascular diseases has increased by 35%. The mortality rate from ischemic diseases has increased considerably. Tuberculosis still represents a big danger. Its main source is the penitential system; 5%–10% of prisoners suffer from this disease. The frequency of tuberculosis is increasing among children and adults. In 2001, the number of registered HIV/AIDS was 232³. The actual number of HIV infected persons is about 2,000. Cases of diseases that were considered eradicated as malaria and hydrophobia have increased.

112) The reason for the increased number of diseases lies in unhealthy life styles, lack of basic knowledge, diagnostic capacity and preventive medicine. Tobacco consumption has reached catastrophic levels with 65.5% of males and 15.7% of females smoking. Among children aged 12–17, 55% of boys and 45% of girls smoke. The number of pregnant smokers in the age group of 17–25 is 28%.

113) The consumption structure of food products is poor. Only 7–20% of food energy consumed on average comes from meat, fish and dairy products. The share of bread products is 65%–85%, which is a high figure⁴. The situation is even more difficult for those in extreme poverty, where only 10% of food energy consumption is from meat, fish and dairy products. 61% is from bread.

114) Poverty and scarce resources are the main reasons for unhealthy life styles, malnutrition and delayed and insufficient treatment. The poor have few means to access medical treatment in costly and high quality private medical institutions. Chronic diseases are characteristic of poverty. Health risks are higher in poor families. Additionally they tend to deploy less preventative measures. Illness and disease requiring hospitalisation as well as long rehabilitation endangers the majority of non-poor households. Expenses incurred on health results in short and long-term negative impacts—the probability of a serious deterioration in health and the need to spend a large one of sum of money. Worsening health conditions from malnutrition, stress, and a lack of preventative medicine lowers labour productivity and ultimately the stamina to surmount poverty.

115) The share of government expenditure on health is one fifth of total expenditure. The main portion is for treatment rather than prevention. State expenditure on preventative medicine is 14% of total government spending on health. Levels of immunization vary from 72.2% to 94.8%⁵.

116) The number of doctors is 28,000, i.e. approximately 440.4 doctors per 100,000. In 2001, 19, 530 hospital beds were occupied by patients in 278 hospitals, i.e. nearly 440 beds per 100,000. This approximates with average European levels (593.5 hospital beds per 100000 in 1999)⁶. Despite the increased frequency of disease, hospital beds are not occupied to capacity, because patients prefer self-treatment or in extreme cases, use specialized, dispensary and diagnostics services outside the primary healthcare system. The average extent of hospital bed occupation is 28%, and the duration is about 9.7 days. This suggests that the healthcare system is inefficient.

117) Education is another fundamental component of human capital. Georgia has traditionally been associated with universal education opportunities. The school enrolment ratio is nearly 98%. However, 2% do not get basic education. Not more than 5% of the population has received only elementary or pre-elementary education. 40% of the population of more than 15 years has secondary education, 20% vocational education and 24% tertiary education. The quality and suitability of education for present day requirements lags behind the quantitative picture. Inequality of opportunities has increased and the young poor are progressively deprived of the opportunity to study at quality tertiary education institutes. There are no mechanisms to assist the poor in education.

118) In many cases the school environment is unsatisfactory. Text books and other study materials are outdated or insufficient in number. The community and parents are less involved in school life. Education is conducted on the basis of outdated methodology and there are no systems to improve teacher qualifications. Modern assessment and examination systems are non-existent.

119) Education considerably defines households in respect to the poverty line. If one household member has tertiary education the risk of falling below poverty line is twice reduced. Insufficient attention to education will, result in irreversible damage and may become the biggest impediment for development. Education can help overcome poverty. Education as a capital resource or in terms of individual welfare has not been assessed. There is a picture of the tertiary education. At the same time the direct correlation between average educational levels and poverty is obvious – 61% of families with secondary or primary education are poor according to the official minimum subsistence while for those with tertiary education, this indicator is 37%. The difference is greater with respect to extreme poverty. About 22% of families with low education levels live in extreme poverty, while only 8% of families with tertiary education live in the same condition.

120) Reform of the education system is underway supported mainly by international donors. Secondary education reform with World Bank assistance seeks to improve quality, and ensure compliance with the requirements of a market economy and democratic practice. Government spending in education is only 2.5% of GDP. Insufficient financing is the most important difficulty of the sector. Existing standards do not correspond to modern requirements, especially in terms of staff/student ratios, school space, curricula and teacher qualifications.

1.1.8. Poverty and International Community

121) The social, economic and political developments in the county closely relate to large-scale processes taking place worldwide. The most fundamental process in the world is globalization. This is the implementation of universal values and the establishment of a uniform information space, the opening of domestic markets and global migration, commodity and information flows, as a result of revolutionary development of information (digital) technologies and economic relations. Globalization has a huge potential in terms of democratic and economic development. However, similar to all powerful processes, globalization is associated with certain risks. Georgia should have a clearly defined strategy to participate in globalization and integration processes directed towards the development and preservation of national values and originality.

122) After declaring independence, Georgia received substantial international aid (see Annex 3). However, it is necessary to use aid more effectively through improved coordination among donors, as well as between the government and donors. In future, it will be essential to use better the capabilities of local experts and consider their opinions.

123) International experience in poverty reduction is a large resource. It is easily accessible for civil servants as well as for non-government organizations (NGOs) and citizens. It is important that the materials on both successes and shortcomings and mistakes in socio-economic measures are accessible. It is impossible to prepare and implement a successful programme of economic development and poverty reduction unless all international experience is taken into consideration.

124) It is to be noted that there are problematic issues such as international terrorism, trafficking drugs, arms and human beings, and smuggling. The poor are double victims of criminal globalization as they are more likely to be the victims of trafficking. It is especially hard for them to overcome drug addiction, because they are financially needy. Moreover, the poor represent potential associates of criminal networks. They are the ones who are detained as a result of operations by law enforcement bodies. The poor and unemployed face a constant dilemma—to stay in dull economic reality or get involved in criminal activity with the hope for rapid enrichment. This merely exchanges poverty for another type of vulnerability.

1.2.1. Governance

126) Governance related issues are inter-sectoral and cover all areas economic and social levels both public and private. Tackling these issues is fundamental for economic development and poverty reduction.

127) The current structure of governance systems is overloaded and inefficient. Frequently, responsibilities are not clearly defined and separated. Initial steps have been taken in decentralization and transparency. Budget and state property management are especially problematic.

128) Officials lack professional managerial experience, strategic vision and planning skills. They are not prepared to operate in emergencies. Competence and responsibility standards have not been established.

129) The absence of professional ethics is a major issue. There are frequent cases of conflict of interests, corruption and the domination of a particular group or private interest. Frequently, administrative structures are merged with the interests of financial and political groups. Thus far conditions have not been created to establish market values, protection of property and personal rights, competitiveness, civic duty and transparency among public officials. The level of tax culture is low.

130) The relationship between central and local government needs to be settled. Their functions and responsibilities have not been clearly separated, and financial arrangements have not been worked through. The legal interrelation between region and district needs to be clarified. Despite the policy of decentralization, the rights of local self-governance are restricted.

131) Principles of democratic participation should be introduced. Governing structures should pay more attention to public opinion and independent experts. Actions and policies are not explained, clarified or justified.

1.2.2. Macroeconomic Policy

132) Economic development depends on efficient macroeconomic policy. Current economic growth rates can be considered as a positive. However, this is not sufficient to approximate with the standards attained by the developed countries, particularly those countries within the European Union. In the event of low growth, poverty reduction will be postponed to the remote future.

133) One of the most significant problems of fiscal policy is the scale of shadow economy. This has the concomitant effect of low tax collection levels and corruption. The existing tax legislation requires improvement on top of improvements in tax administration and enhanced tax collection mechanisms.

134) Another important issue is the servicing of foreign debt. Paris Club restructuring is on the agenda. Foreign debt that is not directly subject to Paris Club decisions is especially difficult.

1.2.3. Shadow Economy

135) The extent of the shadow economy jeopardizes macroeconomic stability. The shadow economy represents an impediment for real sector growth. The shadow economy is an issue that touches all economic sectors.

136) The shadow economy is a major reason for the prolonged budget crisis. Research suggests that tax revenue from gasoline, diesel and propane should be in the range of US$140-200 million. In 2002, tax revenue from these products totalled US$46 million only. Legalising petroleum products only would increase tax revenues by about 30%⁷. A similar situation exists with tobacco products, where the indicator of illegal turnover is 60–70%.

137) The Ministry of Economy, Industry and Trade has calculated that the shadow represents 34% of the overall economy. Independent experts suggest different assessments.

138) Legalising the shadow economy is connected with certain issues. Regulations are poor and sometimes obscure. A majority of business prefers to collude with administrative and tax bodies.

139) Corruption is a major impediment to enforcing laws and regulations. Reducing corruption will increase the formal economy. An Anti-Corruption Programme has been devised and an Anti-Corruption Bureau set up. No visible accomplishments have been seen so far.

1.2.4. Structural and Institutional Development

140) Structural development implies the establishment of appropriate economic and social systems and development of a logistical and public infrastructure. Institutional development is a basic component of structural reform, covering the development of political, social and economic institutions. The majority of factors hindering economic development and, correspondingly, poverty reduction are structural and institutional.

141) A financial infrastructure, investment and insurance institutions and other elements required a modern free market are in place. However, a lot more needs to be done to create a favourable business and investment climate.

142) Private property as a necessary pre-condition for a market economy is protected by legislation. However, in practice, property rights are not properly ensured and protected. Arbitrariness in court decisions or interference with the judicial process in this area and in contract law is quite rare.

143) Initial measures have been taken to enforce efficient market mechanisms for the registration and transfer of property rights. This will increase capitalization and liquidity of available resources and assets. Important measures should be carried out, especially with respect to registration and inventory of resources.

144) Georgia’s enhanced transit role has increased attention on the existing transport infrastructure. The underdeveloped state of the road system, terminals and other components is impeding transit and domestic market potential.

145) Both the economy and society require mechanisms and institutions for labour protection and the introduction of professional standards. Labour market mechanisms should be improved. Existing professional unions and associations only partially perform their functions. The notion of a social contract is unknown.

1.2.5. Investment and Export

146) Production can be increased only through investment. To this end, it is required to create a favourable business climate, and efficient financial and investment institutions. Investments should enhance export potential and help to reduce the trade deficit.

147) Political and social instability, corruption, security concerns and the existing professional culture hamper the growth of direct foreign investment.

148) The low levels of domestic investment are the result of poverty, limited investment resources and the restrictive nature of local instruments. The corporate securities market is underdeveloped. The process of incorporation (turning state enterprises into joint stock companies) in most cases was formal. There are no investment or unit funds, and as a result, it is difficult for small-scale proprietors to start up in business. Most financial resources circulate in the shadow economy.

149) The advantages granted by the membership in the World Trade Organization are not applied in full. Transitional mechanisms for domestic market protection and export are insufficient. Smuggling and falsification inflict considerable losses.

150) The fight against monopolies, smuggling and falsification should be intensified. There is currently little incentive to produce legally.

1.2.6. Production, Employment and Labour Productivity

151) A quantitative increase in production is important. However, it is equally important to make better use of available resources. This requires introducing new technologies and technological processes, enhancing labour discipline, organization, qualifications and responsibility, especially of managers.

152) The introduction of modern technologies is proceeding slowly. The share of modern equipment and technology in the total volume of industrial equipment as well as the added value generated is very low. Science is in a difficult condition due to scarce financial resources and organizational difficulties. This is very harmful in the long-term.

153) A poor bankruptcy system inflicts serious damage on business efficiency.

154) Labour organization is far from best international practice. This is, due to a lack of qualification within managerial staff and cheap labour. There is little motivation to enhance labour productivity and labour relations are poorly regulated.

155) The efficiency of state owned resources and assets cannot be raised due to the low level of their capitalization. It is necessary to account for these assets comprehensively and effectively and establish a clear system of ownership and property rights and enforce efficient mechanisms to transfer property rights.

156) It is necessary to enhance corporate and business structures, develop medium and large-scale businesses in the form of JSCs and to allow co-ownership for even small investors.

157) The majority of people employed in the state sector receive low salaries. Thus, they seek additional income sources to overcome extreme poverty. This impedes productive performance. The status and income of the majority of people employed in the private sector or who are self-employed is not properly registered. This makes them unofficially employed according to the tax system and prevents them from registering for social security or enjoying the rights granted under labour legislation.

158) The development of labour resources, effective employment services, improving professional qualifications, increasing business skills and setting professional standards all require attention.

159) The underdevelopment of a market-oriented public mentality and of certain professional skills (management, finance, marketing, corporate governance) is a critical problem.

1.2.7. Communication Infrastructure

160) The fulfilment of the basic objectives of this programme is directly linked to the formation of a transparent information infrastructure. There is currently no appropriate information infrastructure in place to promote sustainable economic development, improve governance, fight corruption, fairly distribute resources, improve the investment climate, protect business, and develop agriculture, education, healthcare and pension systems and tourism.

161) Currently, there is no communication infrastructure oriented on information technologies and knowledge. The level of computer facilities among the population is low. Communication and digital inequality is high not only among the poor and rich, but also among the town and village, mountain and valley.

162) Information infrastructure elements, such as state information banks are underdeveloped. There is a need for significant improvements in the gathering and maintenance of data with respect to natural and legal persons; tax and customs systems; pension, healthcare and social systems; land cadastre, natural resources, premises and legal (including forensic) information.

163) It is necessary to create a communication infrastructure for economic development oriented on information technologies and knowledge. The wide use of computer facilities by the population should be promoted to rectify existing communication and digital inequality. In addition to the development of communication facilities, there should be the creation of Georgian language versions of computer systems that should be widely used.

1.2.8. Human Capital and Social Services

164) Low social service efficiency and the inadequate development of human capital is a nodal problem for poverty reduction. It is especially difficult for vulnerable and poor strata of society to preserve and develop human capital. A depreciation in human capital within these strata leads to deepening poverty tat has the danger of becoming chronic.

165) The current formal and informal education system fails to offer levels of knowledge relevant to development. This is shown in of the lack of a qualified work force (the issue of low liquidity of education). The social adaptation and civic integration for a large amount of the population is complicated.

166) Developments in the education system have the poor in an unfavourable condition. Accessibility to quality education is expensive. Systems that would help talented young people get free education and realize their potential are not in place.

167) The health condition of the population is conditioned by:

• The low efficiency of public healthcare activities, especially in terms of the introduction of healthy life styles and disease prevention;

• The majority of the population does not live in a safe and healthy environment. This increases vulnerability and deteriorates the health condition of the poor;

• Inefficiencies in primary healthcare system result in reduced accessibility to basic medical services.

168) The low quality and efficiency of medical services is a major problem. It is conditioned by poor regulation, weakness in management in state services, and poor public resources mobilization and adequate spending mechanisms.

169) There is inertia in the social security sector. There are insufficient financial resources for universal social assistance. It is necessary to establish an adequate organizational infrastructure and alternative mechanisms. Pension arrears are not repaid on time. The pension and other social allowances are less than the minimum subsistence and produce little effect on poverty reduction even if paid on time.

170) Marginal groups are in an especially difficult condition. Existing social assistance mechanisms fail to produce a substantial impact on living standards for orphans and problem children, those in asylums; lonely aged and disabled people residing in special houses; sick people suffering from mental, chronic and incurable diseases; population groups living in extreme poverty and/or special groups of vulnerable people (homeless, beggars, prostitutes, drug addicts, prisoners).

1.2.9. Emergencies, Food and Energy Safety

171) Georgia is vulnerable to natural calamities such as earthquakes, landslides, floods and avalanches due to its mountainous relief and the seismic situation. There are few resources and mechanisms to mitigate the effects of such phenomenon. There is no comprehensive approach developed to manage catastrophe risk. The system of monitoring and forecasting of natural calamities is underdeveloped. Furthermore, the population is not prepared for emergencies. There are no special education and organizational programmes.

172) Neither the government agencies nor the public is prepared for humanitarian catastrophes, resulting from military conflict and massive forced migration. Civil defence systems and centralized and community rescue services are underdeveloped.

173) A key element of food security is food safety in addition to accessibility. Despite a government decision to set up the “Food Safety and Quality System” in line with EU standards and to prepare a “Food Security Code”, proper control measures have not been implemented properly.

174) More attention needs to be given to the risks associated with animal disease.

175) There is inadequate legislation and administrative mechanisms for the introduction of genetically modified food. As such there is a risk to food and environmental safety.

176) Reliance upon imported energy means that Georgia cannot be called ‘energy safe’. Political interference in sourcing energy continues to cause instability in supply.

177) Energy imports bear heavily on the economy. Ineffective spending of energy resources still takes place, resulting from the improper use of energy saving technologies.

178) Floods, avalanches and other natural calamities, as well as an absence of engineering control jeopardize the safety of the energy, communication, transport and construction infrastructure. There are dangers of colossal damage in the event of a large-scale calamity.

1.2.10. Rural Issues

179) According to the Household Survey more than half of is the workforce is engaged in agriculture. Less than half the population reside in rural areas (the 2002 census found the population split between, 52.4% urban and 46.7% rural). Currently, agriculture provides a large portion of domestic consumption and export. The economic and social importance of agriculture and role of the village cannot be exaggerated.

180) Most agricultural households have insufficient land, technical equipment, knowledge, credit and other resources. As a result, labour productivity in rural areas is low. Competitiveness in agriculture will increase productivity. This is likely to occur through land consolidation and the introduction of modern agricultural technology. However, such changes will inevitably lead to a decline in employment opportunities and will cause significant social and demographic change. The country is not prepared for such change.

181) It is extremely difficult to sell most agricultural products because market accessibility is poor and there are no forecasting systems of market trends for the population. As a result, much of agricultural transactions are in-kind rather than monetized. Therefore, incomes are low especially in money terms. This situation is caused by lack of processing potential of agricultural products and comparatively lower tax rates on agricultural products in neighbouring countries.

182) Insufficient attention is given to soil fertility of arable lands in both the private and public sectors (especially pastures). There is alarming degrees of degradation, erosion, desalinization and desertification of soil.

183) Agriculture is mainly concerned with perennial crops (vine, tea, tobacco, fruits and nuts including hazelnuts and citrus). This is a cause of stagnation in the agrarian system. Taking account of changing market demand, it will take several years to cultivate plantations. There is no mechanism to consider this factor and protect producers from rapid change.

184) The social infrastructure is undeveloped and good health and education services are inaccessible in rural places. This hampers human capital development and the rural population is less prepared for the labour market.

1.2.11. Natural Environment and Resources

185) The natural environment requires special attention. It is necessary to mitigate the adverse effects of man-made pressures and given the scarcity of resources to exercise effective monitoring and control system.

186) There is a conflict of interests in granting licences and the exploitation in terms of management of natural environment. The processes are often in the same hands. This is particularly prevalent in the management of forests and other resources. In some cases control and protection functions are distributed between various agencies.

187) In recent years, revenue from environmental tax has increased considerably. However, management inefficiency in tax administration is a major problem. Environmental tax revenue is not reinvested to tackle environment protection issues.

188) The environment ahs suffered from increased human pressure to satisfy basic needs. As an example indiscriminate logging to meet basic heating requirements has had a devastating effect on forests. The state of the environment has worsened due to the prevalence of obsolete industrial equipment and technologies and the deteriorating condition of infrastructure in areas such as the supply of potable water, sewage systems, waste water and coast-protection structures, and highways. An effective system of penalties and loss indemnification is nonexistent.

189) Providing the population with alternative resources and employment in lieu of introducing a restricted operation regime on protected territories is pressing. This is a source of tension between the centre and the local population.

190) The system for collection and processing of domestic waste is in a very poor state. Domestic waste is disposed of in residential districts or poorly organized dumps. The facilities to properly process domestic and industrial waste are not in place. Businesses and the general public cannot afford and, in many cases, are not motivated to pay enough money to improve these issues.

191) Natural resources are frequently used without proper permission. This results in a deteriorated environmental condition, ruining grazing land and reducing bio diversity. These tendencies are particularly dangerous when proprietary structures are not in place. This is a particular concern in areas of common use whether pastures, forest and water. The resources of national importance—fertile soil (humus) and in part underwater - are not protected.

192) Global climate change and the unsystematic utilization of plants have resulted in a reduction of hydro resources. There is contamination of hydro resources (so called “filtered water”) including those of trans-frontier rivers, e.g.: the Mtkvari, Rioni and Alazani (in reservoirs of the Black and Caspian Seas) resulting from poor functioning of filtering buildings and utilities.

193) While considerable economic and political profit is expected, the construction of pipelines and terminals carry environmental risks, particularly in sensitive eco systems like the Borjomi-Kharagauli National Park, the Black Sea and its coastline.

194) The Black Sea coastline is affected by pollution and coastal erosion. This reduces its recreational value. Poor zoning and planning has contributed to its uneven development.

1.2.12. Territorial Integrity

195) As a result of ethno-territorial conflicts, the government is still unable to control the regions of Abkhazia and Tskhinvali. Hundreds of thousands of internally displaced persons cannot return to their homes. The post-conflict situation inflicts immense political and economic loss—assistance to displaced persons bears a heavy burden on the state, endangers political stability, transport routes are blocked and the economy of the regions is destroyed. Moreover, the conflict zones represent a source of smuggling. The impact of the conflicts has not been fully calculated in economic terms. It is necessary to be able to forecast development levels in the event of these conflicts being resolved.

196) The social adaptation and integration of internally displaced persons is a major issue. The condition of the compactly accommodated groups with little capacity to improve their living is especially difficult.

197) Due to the non-constructive position of the separatist regimes in resolving political issues, the restoration of the economic system in the post-conflict zones has not happened and economic leverages of territorial integration cannot be applied. The people (lonely aged and disabled people) who are dependent on international humanitarian aid are in especially difficult positions.

198) Gali district requires special attention. Instability there stops repatriated people from engaging in economic activities and using basic social services. The discriminatory policy of the local authorities there aggravates the situation. For example it is difficult to receive secondary education in Georgian despite the fact that the entire population is Georgian. The situation is also difficult in Kodori Gorge where the population lives in constant danger.

1.2.13. Migration

199) The high level of emigration is alarming. It has caused demographic imbalances with respect to age and gender and a loss of the most able-bodied groups of people.

200) Despite of the fact that economic migration plays an increasingly role in the economy and represents a way to overcome poverty:

• The direction of migration flows, socio-demographic, ethno-confessional and professional structures, motivations and perspectives have not been studied;

• The government has little capacity to assist labour migrants, by easing their return home.

201) The impact of the market economy, especially in rural areas where slightly less than half of the population lives has led to growing migration into large towns and an unclear future for internally displaced persons. A strategic approach needs to be worked out to consider how migration impacts small towns and large cities.

1.2.14. Legal Environment, Rule of Law, Safety and Human Rights

202) The lack of application of the rule of law hinders the functioning of government agencies to ensure economic development. Little attention is paid to education in the area of legal and human rights and individual physical safety.

203) Despite adopting many progressive laws that on paper are comparable with developed country standards, the lack of enforcement, in certain cases, has created a sense of nihilism and dual standards. This has led to erosion in the legal sector.

204) Reform of the justice and law enforcement system is not completed.

• There should civil supervision of law enforcement bodies. Also officers in law enforcement agencies that engage in crime should be brought to justice. The level of international experience and legal education is insufficient;

• The existing system of investigation and punishment is inefficient and creates a favourable environment for corruption. Reorganization of this system is proceeding slowly;

• Penitential system reform requires special attention;

• More attention should be given to the social reasons for crime, drug peddling, smuggling, trafficking and trade in arms, and their prevention and eradication;

• The administration of juvenile justice and child protection policies and practices needs reform and further improvement.

205) The positive influence of the Ombudsman is obvious. It should be further supported.

206) The number of car accidents has increased. Mortality and disability as a result of car accidents is a serious humanitarian problem and inflicts serious economic damage.

1.2.15. Civil Society and Participation

207) The maturity of civil society is an acknowledged pre-condition for sustainable economic development. The prevalence of poverty is a phenomenon conditioned by the state of public consciousness. The degree of development within civil society is more crucial than the absence of natural resources.

208) The non-government sector is weak institutionally, financially and quantitatively. It is almost fully dependent on external financing, while local sources of financing are practically non-existent. There are no proper conditions for business in creating and financing public non-commercial organisations.

209) The role of community and self-governance is progressively increasing. However, their institutional development despite their importance remains rudimentary.

210) One of the biggest problems in economic development is the existence of cultural stereotypes. This makes society inert and impedes the establishment of a system of values oriented on civic, democratic and free market principles. Much should be done to establish a new consciousness through the unhampered provision of relevant information, as well as through the establishment of a psychological, political and economic environment wherein hard work, initiative and civic duty are valued.

1.2.16. Gender and Age

211) The socio-economic situation has worsened the status of some age groups and caused a gender imbalance. Children and old people especially are in a difficult condition.

212) While gender inequality is generally low, emigration, labour market requirements and the devastated social infrastructure have raised the extent of female labour and social discrimination. Traditional gender roles also create inequality. Opportunities for career and professional growth for women are restricted. Maintaining the family bears a heavy burden on women, while social compensation mechanisms such as free kindergartens and antenatal assistance fail to meet demand. Consequently, it is necessary to formulate a consistent and efficient gender policy.

213) Unemployment among the youth is alarming. This leads to a decline in human capital and moral decline. This becomes reflected crime, alcoholism, drug addiction and suicide. The risk of HIV/AIDS should receive equal attention. Special employment schemes for young people and attractive educational and cultural environments should be established. There is a partial compensation in the increasing number of higher education institutes and systems of vocational education. However, the poor who cannot afford to pay tuition and accommodation fees remain in a difficult condition.

214) Children and adolescents deprived of parental care are in hard condition. This includes not only the homeless, but also the majority of those living in special houses. Children deprived of parental care or from vulnerable or dysfunctional households or those with disabilities have felt more acutely the consequences of the severe reduction in social services. Around 5000 children in institutions form a segregated underclass. They are at a significant disadvantage in adapting to mainstream society when they leave such institutions. Bringing up children in institutions unquestionably limits their potential. The situation calls for child protection reform with the basic premise that alternatives that support families at risk must replace institutional care. It is alarming that a 2% of children do not receive even a basic education. Cases of child labour, violence and sexual exploitation are quite frequent.

215) Specific economic, social and migration factors have altered family structure and the delegation of roles. The moral influence of the family on children and young people has weakened. This has resulted in an increase in juvenile delinquency and problems associated with homeliness, begging, trafficking and prostitution.

2.4.1. Resources and Opportunities

252) The governance system is the main resource of actions described in the document. As other resources are quite scarce and their efficient use depends on good governance, special importance is given to how to improve this system with respect to transparency and accountability.

253) The people, i.e. society at large, whose condition is planned to be improved by this programme, represent the second important resource. The most significant role of the governance is to activate the social and economic life of the population and involve society in a participatory process. This gives people a chance to determine their own destiny. The participatory process described in this programme is based on this approach.

254) The third important resource is the international community’s support to the ongoing democratic and market reforms. Efficient and coordinated use of international assistance, transparency and enhancement of public control in this process, are especially important.

255) Finally, development depends, to a great extent, on the efficient use of natural and geo-political resources. The country is quite rich in different minerals, especially in hydro resources. The hydro-energy potential of the country is high. Furthermore, Georgia possesses unique recreational capacities that create favourable conditions for specialized tourism (medical, cultural, agro and others). Another important resource is geographical location and transit potential both east-west and north-south.

2.4.2. Role of the Government in Economic Development

256) The role of the government is especially important during the transitional period, because it assumed responsibility to implement large-scale economic reforms. Economic policy is based on several principles:

• Minimization of direct government intervention in the economy;

• Ensuring macroeconomic stability;

• A favourable business and investment climate through appropriate legislation, a balanced taxation policy and institutional development;

• Reinforcement and protection of proprietary rights;

• Clear definition of economic priorities and agreement with various layers of society on these priorities;

• Protection consumer interests society at large;

• Transparency and accountability.

257) The government will pay attention to realize prospective economic projects that stimulate economic and technological development country owing to their volume and technological specificity (e.g. pipelines, TRACECA, informational technology).

258) When a choice has to be made between short-term growth and long-term sustainable growth, the priority will be assigned to sustainable development objectives with minimal economic risk and the stability.

2.4.3. Actions in Social Sphere

259) Actions in the social sphere are divided into two groups, each based on specific approaches, servicing concrete strategic objectives, and simultaneously considering the general principles of the programme. These are:

• Actions towards human capital development, enhancement of labour mobility and its reproduction level;

• Actions towards improving living standards of marginal groups;

• Actions towards preventing a drastic deterioration in living conditions.

260) Underdeveloped human capital is acknowledged as one of the factors of chronic poverty. Subsequently, a major guarantee for sustainable and long-term development is ensuring a proper level of human capital. At the same time, low human capital levels jeopardize the sustainability of economic development.

261) Poor health and education indicators clearly demonstrate the problems in human capital development. Both state and household investment in human capital are low. Unless appropriate measures are taken, a further reduction of the human capital level is anticipated. Hence, human capital development is an essential condition for the sustainability of economic development and poverty reduction and occupies a special place in the programme.

262) Improving labour force mobility is one of the programme’s short-term objectives. Labour force mobility represents is a prerequisite for economic development through the increased availability of the resources and reductions of transaction costs. Without the supply of qualified resources in the labour market and recovery of losses, the provision of labour resources required for sustainable economic development will be impeded. The same relates to the growth of household incomes at the expense of increased labour productivity and labour income.

263) The second priority of the social sector is to improve the standard of living of marginal groups. Currently, there is a segment of households below the poverty line that has no potential for economic activity. Thus, their welfare will not be improved even with the country’s economic development, unless the Government and society takes special measures to assist them (without effective redistribution mechanism).

264) The third priority objective is to reduce vulnerability. To this end, the government will promote the enforcement of all possible adequate mechanisms of social risk management through such institutions as market, community based organizations (local, professional or business) and families.

265) The national employment policy will be based on the following main actions:

• Conduction of agreed employment policy in economic and social spheres;

• Stimulation of economic activity and the creation of new jobs;

• Stimulation of human potential development;

• Establishment of social dialogue;

• Enhancement of labour market efficiency;

• Development of labour market institutes.

266) The basic approach of labour market policy includes:

• Conduction of an active policy at the labour market;

• Extension of professional training based on the requirements of the labour market;

• Stimulation of self-employment;

• Intensification of employment policy with respect to young and low-competitive labour resources.

2.4.4. Harmonization of Legislation with European Union (EU) Legislation

267) A necessary prerequisite for sustainable economic development is the creation of stable, predictable and coherent laws. This is a precondition for the establishment of the rule of law. While much has been accomplished a number of laws require further improvement.

268) In accordance with the Partnership and Cooperation Agreement between Georgia and European Communities (EC), Georgia assumed the responsibility to approximate its legislation with that of the European Union. This approximation is conducted in conformity with the Presidential Enactment No. 613, dated June 14, 2001” On A Strategy of Harmonization of Georgian Legislation with EU Legislation” and “The National Programme of Harmonization of Georgian Legislation with that of EU” being elaborated on the basis of the former document. This National Programme is being elaborated by a “Government Commission for Partnership and Cooperation between Georgia and the EU set up in compliance with the Presidential Decree No. 317 of July 24, 2000.

2.4.5. Internal Risks and External Factors Influencing Implementation

269) Internal risks in terms of implementing the programme are as follows:

• Inefficiency of the governance system, lack of competence and motivation of the civil servants, high level of corruption;

• Insufficient level of democratic and market principles and values in society, lack of economic initiative and civic duty;

• Domestic resources crunch; available domestic resources are insufficient to fulfil the goals set by the programme. In this regard, the support from the International Community in the short term is of high importance;

• Large-scale natural calamities and exacerbation of territorial conflicts.

270) Implementation of the programme is connected with processes taking place in the region as well as in the world that directly Georgia’s economic and political stability. These are in particular:

• Geopolitical realities and the fight against international terrorism;

• East-side development of Euro Atlantic structures;

• Economic situation in the world and energy prices;

• Military action and conflict in the vicinity of the country’s borders.

2.4.6. Broad-Spectrum and Sector-Specific Actions

271) The majority of important issues facing Georgia and the objectives to be achieved are broad in nature, i.e. they are closely connected with multiple aspects of economic and social life. Naturally, subsequent measures are of a broad spectrum and affect numerous events and factors.

272) In the course of implementing broad-spectrum measures, it is necessary to ensure effective intersectoral coordination and supervision. The efficient management of broad-spectrum policy necessitates the functioning of a unified coordination structure, securing synergies of separate measures and a strict delegation of responsibility. Informational provision, transparency and public monitoring of the measures are especially important.

273) Numerous actions envisaged by the programme are sector-specific, even though their effects go beyond the scope of a concrete sector. Hence, such actions will be carried out by relevant government agencies. There is a danger that policy will be applied primarily to benefit a specific government agency, or will be based on a narrow strategic vision. Correspondingly, the programme discusses individual sectors and relevant actions in line with state interests in both the short and long term. The development strategy of each individual agency should be based on this unified programme and priorities should be identified on this basis. While planning each sector action, there should be an evaluation of it consistency with the overall system of priorities, how its synergy correlates with other sectors and intersectoral actions and what indirect effects this particular action may produce.

2.4.7. Informational Provision

274) To implement the measures envisaged by the programme, it is necessary to ensure information provision and establish feedback links. Along with dynamic information flows, it is also necessary to create corresponding information databases, where complete information on objects to be influenced by strategic actions, as well as available resources can be consolidated and processed. It will be of great importance to have reliable information at local level, where information collection and organization currently do not function.

275) The availability and use of reliable and complete information is an essential element for successful management. Public access to this information is equally important. Openness and accessibility are necessary prerequisites to secure legitimacy of action, ensure public participation, and to foster support.

2.4.8. Regional Specificity

276) A specificity of Georgia is its geographical and cultural diversity that, on the one hand, is a fortune, but on the other, complicates the application of a unified approach to the implementation of actions. Thus, in the course of implementation, special attention will be given to the correspondence of this or that action with the concrete geographical and cultural environment.

277) Special attention will be paid to such geographical diversities as: city-village, mountain-valley, climate and natural environment, administrative status, demographic and cultural factors.

278) Regions of the country differ in terms of economic and resource potential. Therefore, this difference determines the efficiency of this or that economic activity, the level of poverty, and the need for specific social actions.

279) Based on these specificities special regional action plans will be elaborated based on this programme. It is necessary to monitor the regional level and ensure efficient feedback.

2.4.9. Rural and Mountainous Regions

280) As part of the population resides in a difficult geographic environment, and more than half of the population is engaged in agricultural activity, this sector of the economy has acquired a special social function and significance. It is especially difficult to improve living standards in mountainous regions. Therefore, special attention will be given to the elaboration of efficient programmes targeted at the development of mountainous regions.

281) In rural and especially mountainous areas social infrastructure should be developed, qualified healthcare and education should become accessible (especially for the poor), development of human capital should be fostered, and professional education expedited, so that the rural population is prepared to enter the general labour market in the light of expected social changes.

282) Increasing competitiveness in agriculture will result in enhanced labour productivity. Developing the land market will lead to the merging of land plots and the introduction of capital-intensive agricultural technologies. Consequently, certain social and demographic changes will take place. The government will facilitate the introduction of intensive agricultural technologies, while taking steps to foresee and mitigate the negative impact of these processes.

2.4.10. Youth and Development

283) Youth related social and economic matters at the centre of the programme. Sustainability and a proper future cannot be secured without the involvement of youth in the development of the country.

284) It is necessary to carry out complex employment policies and special employment schemes. Prolonged youth unemployment should be eliminated to avoid a degradation of human capital and its moral erosion, which causes crime, alcoholism, drug addiction, prostitution and suicide.

285) Young people will be offered equal opportunities for personal and professional development and access to the labour market notwithstanding their financial capacity. State targeted programmes in the educational, social and cultural spheres will be implemented. Assistance will be provided to especially talented young people, who cannot afford to pay tuition or accommodation fees to receive education.

286) Special attention will be paid to specific programmes for orphans and for the homeless to fully integrate them with the rest of society.

287) A Nation Action Plan for Children is its final phase of finalization. It has specific activites to resolve existing problems. This Action Plan covers the period 2003 to 2007.

2.4.11. Gender Factors

288) During implementation attention will be paid to gender issues. This will involve the formulation and implementation of a consistent and effective gender policy, actions aimed at reinforcing the economic and social status of women and the proper consideration of gender in planning socially important measures.

289) Gender factors should be taken into account in economic policy. This includes:

• Gender aspects in the process of planning and allocation of budgetary funds, regulation of the labour market and social policy;

• Improvement of labour legislation considering gender factors;

• Ensuring social safety in economic activity;

• Enhancement of female economic activity, implementation of various programmes promoting professional training.

290) The Programme will facilitate:

• Implementation of educational and preventive measures to alter traditional gender roles which put women in unequal, subordinate positions;

• Reduction of labour and social discrimination of women;

• Reduction of offensive practices to women, reduction of family violence.

291) Specific economic, social and migration factors have changed the structure, sustainability and delegation of the roles in families. An analysis will be made of these processes and considering gender and age factors.

2.4.12. Culture and Science

292) Improving living standards in addition to material welfare implies the satisfaction of cultural and spiritual needs and an attractive and satisfactory cultural environment. An essential element to enhance the quality of life is to create conditions for an individual to realise his or her potential, primarily through educational and creative needs.

293) The difficult situation facing Georgia’s culture, despite the existence of many creative personalities, a rich cultural heritage, should be surmounted. The state should introduce cost-effective (for example digital) technologies to save cultural heritage and promote a lively cultural life. In the environment of cultural pluralism and globalization, the mechanisms applied by the government to facilitate culture need to be revised. It is necessary to adopt programme budgeting for the cultural sector. This should apply to the arts, the protection of cultural heritage, clubs, books, libraries, educational institutions, regional, municipal and district cultural offices. The number of such institutions is four thousand and each has more than twenty employees.

294) The condition of science and the introduction of new technology and know-how are closely connected with the development of education, and in particular higher education. The development of education and science is the only way for the country to become modern and developed. It is very important to target funds for science and reorganize the management system in parallel to increased spending.

295) With limited resources for scientific endeavour it is necessary:

• To establish close links between scientific research and the higher education system, to improve coordination between these spheres through integrated actions and programme-grant budgeting for the scientific research;

• To support applied research so that it gradually becomes one of the functions of business together with the development of high technology;

• To stimulate private charitable donations to finance fundamental research by programme grants.

2.4.13. Civil Society and Human Rights

296) Introducing the principles of democracy and the freedom of the individual is one of the top political and strategic priorities of the country.

297) The level of a population’s awareness conditions the development of civil society. In order to alter outdated cultural priorities of public consciousness:

• The government will strive to establish a system of values oriented on civil, democratic and free market principles as well as a new consciousness through unhampered provision of relevant information and creation of such psychological, political and economic environment wherein honesty, hard work, initiative and civic duty will be highly valued;

• Attention will be paid to the protection of human rights, and especially the rights of those who lack adequate education, resources and social capital to safeguard their own rights;

• Special programmes will be implemented to educate the population in legal, especially human rights matters.

298) While carrying out reform in the judiciary and law-enforcement bodies, the focus will be made on the following issues:

• The judiciary will become the major guarantor for protecting personal and economic interests;

• Public supervision mechanisms will be elaborated to eliminate human rights abuses in the process of preliminary investigation and imprisonment. The principle of the presumption of innocence and safeguarding the rights of a suspect will be reinforced;

• International experience will be introduced and the level of legal education improved;

• The executive punishment system will be reformed to international standards;

• The Institute of the Ombudsman will be enhanced. Efforts will be made to improve the legal and organisational arrangements of this Institute and strengthen the authority of the Ombudsman.

299) To ensure improvements in the institutional and financial capacity of the non-governmental sector, it is necessary:

• To generate local sources of funding;

• To further enhance the role of community and self-governance in society and institutionalise its development. To promote community structures and interest groups based on territorial principles;

• To facilitate unimpeded circulation and accessibility to information in both electronic and printed media throughout the country.

3.1.1. Governance System Reform and Resources

300) The programme for economic development has been conditioned by dire social need. Economic development should be directly connected with a substantial reduction in poverty. There is a decisive role to be played by the government in the programme. The government will be required to exert great political efforts to ensure the establishment and effective functioning of institutions to implement the programme within the existing environment of political and economic freedom. This will necessitate not only “small governance” but also “good governance”. This will ensure compatibility between liberal economic development and social needs.

301) Despite current economic weakness, the government mainly has the political resources to implement the programme. However, the public administration system should be reformed in such a way to ensure its capability in resolving fundamental issues facing the country. The purpose of reform is to establish social, economic and political mechanisms that will secure an effective environment to mobilize all the forces in society to ensure universal well-being based on economic development and social equality.

302) Objective difficulties related to the reform process should be fairly distributed among all groups and layers of society. The concept of the fairness should be formulated at the initiative and guidance of the government. All the changes envisaged by the programme are directed towards a drastic decline in the difference between the demands of the population upon the government and the government’s realistic resources to meet these demands.

303) Currently, the government is working on basic public administration systems reform programme. This document does not provide full details of reform. Rather it defines the main directions and issues of governance reform. The measures already identified by the government are described in an attachment to this document.

3.1.2. Reform Elements

304) To establish “good” governance system, it is necessary that social goals acquire a main reference-point for development. The institutional arrangement of the political system should ensure that:

• Public policy goals are defined through a political process sensitive to social demands;

• Basic public values are reflected in policy goals and mechanisms;

• Government is responsible for the compatibility of set goals and coordinated implementation of corresponding policies.

• The social effects of political decisions become the main criteria for assessment.

305) Government policy should ensure that the country’s resources are used primarily for those who need them most. Public administration should ensure the establishment of a minimal guarantee system of equal material and personal security of all citizens.

306) The public administration process should start with understanding social ailments and finish with a public assessment of the effects of the action programme. Programme structuring of the state budget is vital so that the distribution of public resources corresponds to policy goals. Institutional reform is necessary to secure political control over the budgetary process, the compatibility of the different hierarchic budget levels and responsibility between them, and the monitoring of budget execution and public control systems over the budgetary process.

307) Executive government reform will be based on a clear definition of the role and functions of the government in the economy and social sphere. The government should play the role not only as a supplier of public goods but of a stimulator, organizer and regulator of corresponding processes. The enhanced effectiveness of the executive should be achieved by strengthening administration and through the formation of a governance policy and raising the overall professional culture.

308) It is necessary to differentiate political, regulatory and logistical functions of the public administration system in the economy, to eliminate their administrative impact on each other.

309) The development of the private sector requires government to conduct a policy favourable for business. There needs to be a regular dialogue between government and business so that primarily representatives of small and medium businesses are given an opportunity to participate in the formation of public economic policy. Economic development considerably depends upon the effective institutionalization of such a dialogue.

310) Democratic development in local government requires it to be freed from the current ineffective control of central government. This is a fundamental and defining condition of the principle that the government should be as close to people as possible. Decentralization of public administration should satisfy the subsidiarity principle. Managerial decisions should be transferred to the lowest level of the governance hierarchy that has the competence to make the relevant decision. The level of autonomy and implementation of policy should be supported by adequate economic conditions.

311) It is necessary to replace traditional forms of administration by ones that are oriented on the formation and implementation of management policy. It is required to overhaul the vertical organization of the governance hierarchy into the flexible horizontal arrangements. It is also necessary to reform the system of public service in which there will be new skills of policy formulation.

312) The design for the reform of central government and the public sector should be guided by the principle of devolved government and recognition of the twin realities of a constrained budget, and the current state of government weakness. In these circumstances, the main pre-condition for improved efficiency and effectiveness of government is by downsizing public administration to a level commensurate with budget affordability. Only in this way can adequate incentives be provided to attract and retain the skilled personnel needed. The reform strategy should consist of three main components:

• The restructuring of functions and the downsizing of the administrative system through devolution, reviewing the mandates and structure of government, and the roles and responsibilities of individual ministries and state departments;

• The implementation of intra-ministry self-reorganization to strengthen systems, capacities and culture, based on a uniform strategic planning methodology, supported by technical assistance and monitoring;

• The improvement of systems, capacities and culture through human resource development based on training, capacity building and developing civil service legislation, and dealing with overstaffing.

313) This stage of the administrative reform should be implemented in two overlapping phases. The first phase, which began in 2003 and will run through 2004, is focusing on the restructuring of functions in the executive. Overall, this should involve the reduction of existing ministries and state departments. A reduction in personnel of 30% is anticipated, 20% in 2003–2004 mainly through natural attrition, and another 10% in 2004–2005. The restructuring is based on the following guiding principles:

• Minimal government and maximum devolution;

• Development of clear definitions of core governmental roles and functions;

• Efficient resource use which eliminates overlapping and the duplication of functions;

• Rational use of scarce budget, manpower and management resources by concentrating core competencies and key skills;

• Unified approach to functional, structural and organizational reform;

• Separation of policy, regulatory and service delivery functions to allow focus on core competencies;

• Rationalized supervision and management systems to avoid current wide spans of managerial responsibility;

• A pay and incentive system;

• International experience, particularly institutional arrangement models of those countries that are joining the European Union.

314) The government has worked out a Concept of Reforming the Security and Law Enforcement System (The concept was approved by Presidential Decree No. 1285 of October 11, 2002). According to this decree, respective ministries and agencies were assigned to present a list of measures with specific time frames and cost evaluations. One of the main goals of the concept is the protection of human rights and fundamental freedoms granted by the Constitution and the European Convention on Human Rights and improving law and order. The key directions of this concept are:

• Investigation and enquiry service reform;

• Reform of legislation on criminal procedures;

• Police reform;

• Special training system in law enforcement agencies;

• Reform of institutional arrangements and internal administration in law enforcement and security agencies.

315) The simplification of legal proceedings is needed to increase the efficiency of the operation of law enforcement agencies. Significant amendments to the Criminal Procedure Code were emphasized in the concept. The protection of human rights requires detailed legal regulations of law enforcement operation and transparency in their actions. A concrete plan for the structural reorganization of law enforcement and security has been prepared. Particular attention has been paid to the education and retraining of personnel (both mid and high level).

316) Judicial reform will be continue and special attention will be given to:

• Improving personnel policy;

• Infrastructure and logistical support;

• Specific anti-corruption measures;

• Improving the execution of court rulings.

317) The implementation of this programme depends on state security and defence issues. Within this context Georgia is attempting to integrate into Euro-Atlantic institutions. The government cooperates closely with NATO and its partner countries, and a significant part of this programme concerns defence and security policy. The major topics are: reform in the defence and security sector; defence planning; issues of military policy and capacity; economic defence issues; defence and security spending. This programme cannot be fully integrated into the EDPRP, but as it is finalized and particular measures defined, its main concepts and costing will be reflected in the EDPRP.

318) Elimination of corruption in the government system requires joint efforts of society and the government. The government has already elaborated its anticorruption programme. The enforcement of the Reform and Reorganization of Central Government and the Public Sector is one of the main anti-corruption documents. The implementation of this policy requires systemic and a no-compromise approach to anti-corruption activities.

319) In forming civil society, the government should restrict itself and create space for joint activities with society and independent civil activities. Relevant state programme should provide for an effective delegation of responsibility between government and civil society and should be duly reflected in legislation. The government is responsible for the creation of an environment that will offer non-government and non-commercial (non-profit) organizations the opportunity to participate in public administration through active dialogue, safeguard all types of minorities, promote the expansion of confidence-based relations and their institutionalization as a social norm, ensure the development of a free press and media and create political conditions for social responsibility and adequate social norms.

320) The programme defines the basic principles of public administration reform and the general objectives for their implementation. Implementation will certainly face political obstacles conditioned by private and group anti-reform interests and the unfavourable political situation. Overcoming these difficulties necessitates political efforts and the support of broad sections of society. Therefore, a public participation policy has been determined covering those necessary for effective implementation. The conceptual and organizational strengthening of central government will be necessary to enable it to implement those measures envisaged by the programme. To this end, research will take place to determine and define all the loopholes and discrepancies existing in the current governance system.

321) The EDPRP together with these other programmes and strategic plans will be carried out as soon as possible to achieve simultaneousness and linked implementation. Therefore, as the programmes are finalized and adopted their conceptual principles, action plans, and cost evaluations should be reflected in this programme by amendment.

3.2.1. Monetary Policy

328) In the next 5–7 years, monetary policy will preserve the annual rate of inflation at 5–6%. From 2010–2015, inflation will go down to 3–4%.

329) In the short and medium term, the National Bank of Georgia (NBG) will conduct consistent and prudent monetary and exchange rate policy. This provides for the compliance of money supply with actual economic growth and targeted indicators of inflation. Thus, money will be supplied only through non-inflationary methods, which will enable the re-monetization trend in the economy with price stability. Gradual growth of broad money (M3) will take place so that the monetization indicator is increased by at least 0.5–1% per annum (the monetization indicator currently is 11.1%). The growth of broad money will not be through the growth of reserve money, but through the growth of money multipliers by the attraction of cash outside banks into the banking system and improving the quality of banking services. Considering that the main objective of monetary policy is to ensure price stability, the re-monetization of the economy will happen in compliance with this objective.

330) Reserve money will be supplied from the accumulation of international reserves. The main source of international reserves is aid from international institutions and donor countries and the purchase of foreign currency on the domestic market.

331) From 2003, the NBG will start merging the reserve and correspondent accounts of commercial banks. The minimum reserve requirement (currently 14%) will be partially satisfied by the balance amounts available in correspondent accounts of commercial banks. This mechanism will reduce the reserve rate and will improve the liquidity of commercial banks, enhance the efficiency of the banking system and facilitate a reduction of the interest rate.

332) The practice of long-term government lending will continue mainly for servicing the country’s external debt. However, this source of money supply will later be replaced by less inflationary mechanisms. The main domestic source of financing the budget deficit will be treasury bills. In this respect, considerable attention will be paid to the planning of treasury bills to avoid crowding out investment, as by issuing T-bills the government competes with the private sector at the credit market.

333) The main emphasis within monetary regulation will be placed on open market operations—re-purchase and reverse re-purchase transactions. Putting them in practice is a top-priority for the NBG because this will enable commercial banks to manage their liquidity more effectively and the NBG to regulate the money supply more promptly.

334) In 2003, part of the GEL 800 million debt of the Ministry of Finance to the NBG will be securitized (transformed into long-term government bonds). This will allow the NBG to possess a significant treasury bond portfolio for open market operations and, more importantly, obtain a new and powerful mechanism for monetary regulation. In particular, this mechanism will allow adjustments of commercial banks’ short-term liquidity to mitigate fluctuations at the money market, as well to rapidly sterilize increases in money supply under exogenous factors.

335) Exchange rate policy will be based on a free-floating regime and the NBG does not plan any changes in this regard in the short or long term. At the same time, the promotion of international competitiveness of domestic goods and services and export promotion will remain among the top priorities of exchange rate policy. However, this policy will not be based on currency devaluation principles.

336) The NBG will continue to pay great attention to the replenishment of gross international reserves, so that their amount reaches at least 2.5 months of import equivalents by 2004–2005 and 3 months by 2007. This corresponds to the minimum level required for general macroeconomic stability.

337) To conduct purposeful monetary policy and attain fast and sustainable economic development, one of the most significant objectives will be to improve financial intermediation, and the banking sector. The development and unhindered operation of the banking system will remain the main priority of the National Bank. The activities to be carried in this regard are described in 3.3.4.1. “The Banking Sector”.

3.2.2. Fiscal Policy

338) Fiscal policy objectives for 2003–2005 are:

• 1. Improving the business and investment climate;

• 2. Maintain the budget deficit (on a commitment basis) at 1.0–1.5% of GDP;

• 3. Annual increase of tax revenue to GDP ratio by 0.5–0.8%;

• 4. Steady growth of tax revenue in relation to the tax base;

• 5. Substantial growth of the tax base by encouraging extralegal businesses into the formal sector;

• 6. Enhancing domestic financing sources—gradual growth of maturity and volume of treasury bills;

• 7. Debt sustainability: the share of net present value of debt will not exceed 150% of exports and the share of net present value of debt to central government revenues will not exceed 250%.

• 8. Increase in the share of investment spending in the budget to 2.5% of GDP.

339) These objectives will be reached by improving tax and budgetary policies.

3.3.1. Business and Investment Climate

358) The development of entrepreneurship, attraction of investment, implementation of the national anti-corruption programme and the legalization of extralegal businesses constitute the top priorities of the country. In To establish a normal investment and business climate, it is important to fulfil all the priority objectives and components prescribed by the programme. In this regard it is also necessary:

• Microeconomic analysis of leading economic sectors. The analysis should cover existing and recommended technologies, input costs, production costs, and market prices, taxes, tariffs and other legal and regulatory constraints. On the basis of this analysis models will be created concerning the functioning of specific businesses/sectors. This will help legality and ensure the practical operation of the businesses/sectors. Macroeconomic models will be created based upon the integration of the microeconomic data.

• Improve the system of controlling bodies. Along with the law “On Control of Entrepreneurial Activities”, a law “On Rules of Delegation of Authorities of Controlling Bodies and Exercising of Control” should be adopted. This will help to eliminate inconsistencies between the normative acts related to state control of entrepreneurial activity.

• Transparent mechanisms for licensing and permits for entrepreneurial activities. The rules to issue permits in the sectors that are not covered by the law “On Licensing of Entrepreneurial Activities”, are defined by specific agencies or local government bodies. Frequently, decisions taken by such bodies are illegal and faulty. This complicates business activity and promotes a corrupt environment. Therefore, changes to the exiting legislation should be prepared to define what should be subject to licensing, capture all the licensing spheres and basic procedures. The legislation should nominate an agency that will oversee licensed institutions and define forms and procedures of control. Licensing needs to be regularized further in respect to the following sectors: pharmaceutical industry, education, construction, trade, advertising in the streets, civil transport and the use of natural resources. Special attention will be paid to determine licensing fees and create transparent mechanisms.

• Simplify and improve standardization and certification. Simplification and improvement of the system will help to remove low quality goods and services from the market and reduce associated costs. The phased transfer to the system of voluntary certification will be continued, as conditioned by the World Trade Organization. The law on “State Certification Fees” will be prepared, the system of certification by private companies will be improved, mechanisms of control on certified products will be determined and a roster of standards published.

• Antimonopoly legislation and agencies. Given the serious duplication of functions among government agencies in the state control and regulation of natural monopolies, institutional reform of the Anti-Monopoly Service will be implemented. The definition of monopolist enterprises, mechanisms regulating their activity and the consumer protection will be enhanced.

• Protection of business and consumer rights. To protect the rights of honest entrepreneurs, criminal charges on unfair competition, falsification and other economic offences will be tightened. The Administrative and Criminal Codes will address offences characteristic of a modern market economy.

• Unhampered movement of goods and services. To allow the unhindered movement of goods and services, formal and informal barriers will be removed. Due orders will be introduced in tax and customs offices and traffic police.

• Trade liberalization. Legislation will be refined in line with WTO rules considering the grace period granted by this organization.

• Export promotion. Export policy will be based on relevant strategies, which will identify priority sectors oriented on the export of goods and services and potential target markets. A complex programme of export promotion will be worked out, which in parallel to individual measures to be carried out in specific sectors will encompass:

  • — Systems of confessional lending and insurance of export operations;

  • — Formation of special units for export promotion and dissemination of relevant information;

  • — Simplification of licensing barriers, tax and customs procedures;

  • — Regularization of VAT refunds to exporters;

  • — Formation of a favourable regime for international trade.

  • — Usage of advantages granted by the WTO. This includes the enforcement of mechanisms against unfair competition, popularization of information on tariff preferences and its application;

• Stable and predictable legal environment. Investment legislation stability is very important for investors. Profit is also important in accordance with the terms defined and agreed in the period of initial investment. The government assumes responsibility to create a stable and predictable legal framework, the amendment to which will be aimed only at improving the business and investment climate.

• New tax and customs system. This system will be based on the principle of partnership between the government and business and will facilitate:

  • — Unhampered functioning of structures and systems;

  • — Normal functioning of the economy according to micro econometric analysis;

  • — Legalization of extralegal business activities.

• Reduction of barriers to a favourable business environment. Implementation of the action plan jointly prepared by the World Bank, Foreign Investments Advisory Service of the International Financial Corporation and the government.

3.3.2. Property Rights and Capitalization of Resources/Assets

359) To raise natural resource use efficiency (land, water, forests, mineral resources, and recreational resources), the degree of their capitalization should be increased. To this end, it is necessary:

• To create a comprehensive register of resources. To use resources efficiently, they will be described and recorded in accordance with set rules. Resource information will be accurate and comprehensive. The resources will be accounted for by applying modern information technologies and will be public.

• To establish a clearly defined ownership system and resource usage rights. The mechanisms for assigning ownership and usage rights will be strictly and clearly defined (for example, land cadastre, forest cadastre,). Notwithstanding whom the resource belongs to—the central or local government, legal person of private or public law, local or foreign person,), protection and strengthening of property rights will be a constant priority of the executive (including law enforcement) and judicial authorities.

• The mechanisms for transferring ownership rights will be worked out and introduced. Such rights will be defined clearly and the mechanisms for transferring of rights will be transparent and effective;

• Introducing these mechanisms will facilitate the phased securitization of resources and increase their liquidity and market price.

360) Increasing the efficiency of available capital will facilitate by further capitalization of assets possessed by the government, companies and individuals (including real estate, company shares, and government arrears). To this end:

• Comprehensive and effective mechanisms for asset accounting will be introduced in line with international accounting standards and modern information technologies;

• Clear system of ownership and use of assets will be established;

• Efficient mechanisms for transferring ownership rights to assets will be worked out and introduced;

• Issuing securities on the basis of such assets will be promoted increasing liquidity and market prices.

• In court practice, precedents of realization of property rights supported by mechanisms of contract law (including mortgages and credit agreements) will be established.

• Enhance the efficiency of corporate structures will be facilitated. Efficiency of these relationships will condition the profitable utilization of all factors and ultimately, the successful performance of the company.

• Introduction of new technologies in business will be promoted.

3.3.3. State Property Management and Privatization

361) The basic objectives of government policy in state property management and privatization between 2003 and 2005 are:

• Accelerate state property privatization process;

• Establish a competitive environment, de-monopolization and strengthen anti- monopolistic mechanisms;

• Attract investments in companies to be privatized;

• Ensure transparency and management efficiency of state owned companies and those sold to strategic investors;

• Utilization of transparent and efficient mechanisms in privatization;

• Development of the securities market;

• Involvement of a broad spectrum of entrepreneurs and private owners (including those with low income) in the privatization process;

• Stimulation and facilitation of timely and effective activation of privatized companies;

• Systematization and improvement of accounting and management processes in state owned real estate;

• Improvement of accounting state owned shares of Joint Stock Companies (JSC) and Limited Liability Companies (LLC); elaboration of new, efficient and transparent management mechanisms;

• Improved accounting in the disposal of state property held by legal persons of public law established on the basis of state property;

• Monitoring state property transferred under management contracts to other parties and improvement of control on compliance with corresponding liabilities of such parties.

362) To reach these goals:

• Large state-owned companies will mainly be organized as Joint Stock Companies;

• When tendering controlling shares of large JSCs to strategic investors, the maximum number of balance shares will be privatized through Stock Exchange Auctions;

• In privatization of JSCs preference will be given to Stock Exchange Auctions.

363) In the privatization of state property during 2003–2005, it is planned:

• To restructure and privatize energy companies on terms of investment attraction; to privatize or transfer under management contract Georgian United Distribution Company (GUDC); to rehabilitate and privatize energy generation units; to privatize a block of shares of JSC established on the basis of municipal and district natural gas operating companies; to privatize property excluded from the capital of a JSC after restructuring the state company “SakNavtobi” (“Georgian Oil”); to privatize the state owned block of shares of JSCs established on the basis of commercial intermediation companies; to restructure and privatize the coal industry;

• To prepare the strategy of privatization or transfer under management contract the water supply-sewage system (including those in big towns). The system will be restructured and privatized or transferred under long-term management contracts;

• To privatize state-owned agricultural land;

• Phased privatization of forests;

• To privatize state owned experimental stations, experimental seed-breeding, seedling, breeding farms, machinery-testing stations; transferring to melioration associations of internal farm watering systems (except the high-capacity headwork) on terms of future management buy out;

• To restructure and privatize transportation companies. To restructure Poti Sea Port in line with recommendations of EC experts and transfer the units with operating functions into long-term leases;

• To privatise the (non-industrial) infrastructure not included in the list of assets of the “Georgian Railway” Ltd. The issues of reorganization of “Georgian Railways” into a joint stock company, its further institutional improvement, development and modernization of its technical base in conformity with international experience will be discussed;

• To restructure and privatize telecommunication companies. To privatize JSC “Sakartvelos Elektrokavshiri” (Georgian Electro Communication) and “Sakartvelos Telekomi” (Georgian Telecom);

• Restructuring and privatization of healthcare system objects will be continued in accordance with the plan and terms set by the Ministry of Labour, Health and Social Security.

364) Certain strategic companies will stay under state ownership. They can be transferred under long-term management contract (or rent) to strategic investors by means of international tender.

365) The government will conduct regular efficiency monitoring of state-owned buildings and offices used by ministries and agencies or those recorded in their balance sheets. In agreement with the ministries and agencies, the government will prepare proposals on privatization of non-utilized and/or utilized in a non-targeted way premises in line with legislation.

366) State-owned companies that are insolvent or have arrears significantly exceeding their assets will be bankrupted and liquidated.

3.3.4. Financial Infrastructure

367) Financial infrastructure is one of the most important components of the economy. To attract investment, the sustainability of government and municipal finances, insurance against risks and efficient investment of idle financial resources, it is necessary to develop and improve the country’s financial infrastructure.

3.3.5. Low-Income Sections of the Population in Entrepreneurial Activities

383) The involvement of low-income sections of population in entrepreneurial activities will be encouraged. This will make them not only users/customers but owners as well. For this purpose:

• The development of micro, small and medium enterprises (SME) will be promoted;

• The development of large-scale enterprises in the form of JSCs will be promoted.

3.3.6. Labour Market Efficiency

3.4.1. Health

404) To improve health, three types of priority actions are suggested:

• Actions which provide a healthy and safe environment

• Actions in the area of public healthcare

• Actions in the area of primary and urgent healthcare treatment.

405) In defining this group of actions, the approach and priorities laid down in the national healthcare policy are decisive. In particular: a) a clear identification of government commitment in the health care sector, b) multi-sectoral approach to the actions required for improvements in healthcare, c) increased accessibility to basic medical services, including for marginal groups.

406) The government will determine its commitments and ensure their financing in full. There are two arguments:

• It should become easier for the consumer to take advantage of the commitments assumed by the government if he/she knows which type of medical service is provided and which should be bought;

• Vacant space will be created which can be filled by the market in case of the non-availability of other favourable conditions.

407) There are numerous activities to improve healthcare that are better performed by the state than the private sector. Implementation such measures is a government responsibility.

408) In the course of selecting its commitments, the government will prioritize considering cost-effectiveness (main criteria). Supplementary criteria are moral and cultural factors.

409) Based on this, the healthcare strategy will aim to ensure financial and geographic accessibility to the minimum required medical service for the whole population for a healthy and safe environment. To this end, the following activities should be financed as priorities: a) prophylactics and early diagnosis of diseases, b) dispensary and hospital treatment, and c) medicine supply for replaceable therapy.

410) According to the national healthcare policy, the programmes designated will have a great impact on improving public health. The elaboration, implementation and funding of these programmes are beyond the competence of a single government agency and require the coordinated efforts of the government and society. It will be necessary to implement state programmes that are multi-sectoral oriented with concrete outcomes (e.g. trauma programmes and reducing traffic accidents, health nutrition, anti-tobacco measures and others).

411) Increased financial accessibility to medical services implies the introduction of mechanisms to operate and fund the health sector that will create equal opportunities for everybody to use the service. Where equal opportunity cannot be secured for certain marginal groups, this will be compensated through social assistance mechanisms.

412) In parallel to the targeted programmes, there will be auxiliary actions to improve the quality of existing services, regularize the medical base, enhance the efficiency of private and public healthcare resources, as well as improve the management of state owned entities in the health sector.

3.4.2. Education

413) The educational system is to provide all citizens of the relevant age with modern, high quality education at secondary, professional and higher institutes, and also through continued education.

414) To improve the quality of education, ensure its compliance with the requirements of society and labour market, systemic and consistent reform of all sectors of formal education (pre-school, secondary, secondary professional and higher education) will be carried out.

415) Reform should ensure a generation prepared for a rapidly changing modern society. Reform should develop skills to see future objectives and issues.

416) To improve the quality of education, the World Bank supported Programme of Secondary Education will be continued. This Programme provides for:

• The elaboration of effective management and financial mechanisms, establishment of school autonomy;

• Preparation of a state curriculum with modern requirements, preparation of appropriate text-books;

• Creation and introduction of a new system of assessment;

• Professional training of teachers.

417) As a result of reform, and with public participation, the efficiency of the secondary education system will be raised.

418) To bring up a harmoniously developed person and citizen, attention will be given to improving informal education. This means:

• Identification of interests and creative skills, promotion of self-expression, assistance in professional orientation;

• Introduction of guidelines for a healthy life;

• Development of public awareness.

419) One of the most significant aspects of the poverty reduction is professional education. This means professional training for young people without qualifications, improving professional qualifications and re-training. To establish an effective system of professional education, it is necessary:

• To improve the system of professional education, and ensure its compliance with the need for a qualified work force

• Establish close links between the professional education system and production

• Prescribe new professional and educational standards in conformity with international standards.

420) To enhance the quality of education, reform of the higher education system should be prepared and carried out. To this end, it is required:

• To determine the goals and principles of higher education in accordance with local and international requirements;

• To define the type of higher educational institutes required;

• To identify financial mechanisms for higher educational institutes;

• To separate private and state sectors from a legislative and funding basis;

• To consolidate the state and private sectors into a uniform system on the basis of standardized requirements based on the quality of education;

• To change the substance and structure in the studying process in line with the goals of higher education.

421) The education system should ensure equal opportunity and accessibility. New models of financing will be established that will enable young people to pursue education in accordance with their talent and interests (notwithstanding solvency).

422) To enhance the quality of education, it is necessary to introduce new technologies, equip educational institutes and renovate buildings.

423) Reforming the educational system will have an impact on personnel resources. To this end, arrears in labour remuneration will be paid in accordance with existing legislation.

424) The state contracting system will be reviewed. State contracts should consider labour market requirements, the strategic development of the country and individual regions and the budget. The experience of developed countries in this area should be studied.

425) Special attention should be paid to the issue of socially vulnerable children, orphans, children without parental care, homeless children and those residing in special institutions. The worldwide-accepted method for such children is their integration into society is through adoption. However there needs to be an improvement in the network of institutional agencies. The formulation of relevant legislation has started. The programmes and methods of dealing with such children need to be improved. Key government agencies have taken initiatives to pilot family and community-based systems of care. National policies that support the goal of deinstitutionalizing the system of child welfare by creating community-based and family focused models need to be put in place. In this way, new systems of care can be established while old systems are dismantled. Due to the high significance of the issue, it is required to seek additional sources of financing to better implement the programme for orphans and children without parental care.

426) In line with the government’s commitment to build a “country fit for children” and contribute to achieving the Millennium Development Goals, particular attention will be given to early childhood development. Developing an integrated approach to these services including health, nutrition, social care and early learning and child protection.

3.5.1. Improvement in Social Risk Management

428) The role of the government in the management of social risks is divided into two main groups:

• 1. To set up a social security system to allow any member of the society to acquire social protection;

• 2. To set up a system of social protection that guarantees a decent standard of social integration for those who are not capable to secure social protection themselves.

429) The Government will differentiate clearly between state and other liabilities based upon the following assumptions:

• Economic development creates a resource base to resolve social problems

• Economic activity should ensure a decent standard of living (individual welfare).

430) Any member of society may find himself/herself under a certain social risk. As a result, there is a danger of welfare deterioration and a loss of social status. Certain individuals and households have a high probability of such risks. These are the vulnerable groups in society.

431) The management of social risks in respect to vulnerable people is based on strategies to reduce and mitigate those risks.

432) The management of social risks in respect to marginal groups is based on strategies to improve their standard of living.

433) The programme is not confined to marginal groups only. The priority of the programme is to reduce vulnerability as a whole by improved management. Social protection without reducing vulnerability increases the quality of marginalization that is a heavier burden on society.

3.5.2. Natural, Technological and Other Man-Made Risks

458) The primary responsibility of government is to ensure the safety of the population. This is not only military-defensive safety, but also biological, food and energy security and being able to cope with natural calamities and territorial conflicts associated with emergencies. Given the existence of post-conflict zones in Georgia, military action near the borders and that the country is a mountainous, seismically dangerous region, where natural calamities are quite frequent, great importance is assigned to safety and readiness for disasters. This is even more important in respect to vulnerable layers of society, because they do not have own resources to mitigate the adverse effects of sudden change.

459) It is necessary to create an organizational infrastructure and material reserves. It is also essential to encourage private insurance schemes so that the country is prepared to handle natural calamities: earthquake, landslide, flood and avalanche. To this end, it is necessary:

• To enhance the organizational and resource potential of community mobilization, to prepare the population for action in the event of emergency. For this purpose, educational and organizational programmes should be conducted;

• To restore or create monitoring and forecasting systems of natural calamities;

• To establish a Catastrophe Risk Management Programme, based on risk pooling and clearly defined allocation of risk between the state, the insurance industry and households

• To foresee potential risks at the stage of displacement and planning and implementation of economic activity;

• To plan mobilization actions at all levels in advance;

• To implement prevention measures wherever possible.

460) It is necessary to promote readiness in government agencies and the population to cope with humanitarian catastrophes, in the event of military action and forced migration. To this end:

• A civil defence system should be developed involving centralized and community rescue organizations;

• The functioning of the National Red Cross Organization should be facilitated;

• The Service of Emergency Situations should be provided with resources. Its organizational and professional readiness should be increased.

461) To secure food security, two major elements should be ensured—accessibility of food and food safety. To this end, it is required:

• To set ensure that there is the minimum necessary food reserves and create relevant strategic stock;

• To ensure alternative ways for obtaining food—in addition to local production;

• The government should set up a “Food Safety and Quality” system in line with EU standards. Quality control should be carried out and a long-range action plan devised.

462) Given the dangers posed from animal diseases there should be a tightening of veterinary control and the development of an epidemiological service.

463) It is necessary to prepare legislation in the area of bio safety to avoid problems of trade with genetically modified organisms following entry into the WTO. A control mechanism should be devised.

464) The country’s dependence on energy imports especially in winter has safety issues attached. As a consequence it is necessary:

• To eliminate political considerations concerning electricity supply. Additionally there should be tight control over energy industrial capacities (Tbilisi State Regional Thermal Electric Power Station, Enguri Hydro Electric Power Station) and equipment (Enguri Hydro Electric Power Station);

• To create strategic energy reserves from oil and gas pipeline projects.

• To exercise an efficient approach to reduce electricity costs—introduction of energy saving technologies;

• To utilize alternative, renewable and economic sources of power (bio gas, small power stations, wind, thermal water, solar energy).

3.6.1. Energy

465) The strategy to improve the energy sector includes measures towards infrastructure rehabilitation, improvements in energy generation and transportation and the reduction of waste. It is planned to carry out measures to improve the financial standing of the sector, by increasing collection fees for electricity and gas and better management of the electricity wholesale market.

466) Market principles will be introduced. The centralized wholesale energy market will be decentralized. The wholesale market will primarily be a financial and technical operator. Bilateral direct contracts will occur between wholesale buyers and sellers. This will bring competition and will balance the production and consumption of energy. Tariff policy will be adjusted in line with this model. Price liberalization will thus be ensured.

467) Improvements in the accounting process of the distribution infrastructure will help to reduce energy waste. Criminal charges will be tightened for the theft of energy resources. The disconnection of non-payers will be continued. In addition, the existing practice of providing general social security through free electricity and gas will be abolished. As a result, collection rates will substantially improve.

468) Rehabilitation and upgrading of hydropower facilities is planned. This will increase overall production. Reforms in the sector will attract investment for renewable energy resources. Energy-saving technologies within the industry and in households are planned.

469) Debt will be managed through negotiation with creditors on debt restructuring.

470) In close cooperation with donors, the Electricity Sector Action Plan has been devised. This Action Plan set out improvements in the management of the sector, enhancing collection levels and implementing projects supported by international organizations.

3.6.2. Transport and Communications

471) The development of transport and telecommunication infrastructure is important to build the transit potential of the country. To attain increased efficiency, the strategy is aims to empower transport regulation administration, reduce staff and train retained staff, advance technical and environmental safety of domestic and overseas transportation, introduce advanced management technologies, establish information facilities for the Great Silk Road concept through the design and introduction of relevant databases and software.

472) A wide range restructuring and privatization process will be completed. The material-technical base will be improved and the following goals achieved through the attraction of investment:

• Rehabilitation of marine transportation infrastructure;

• Privatization of railway infrastructure and facilities;

• Restructuring and privatization of telecommunications infrastructure;

473) Considering the country’s transit role, special significance will be given to the TRACECA Project. On the basis of systemic analysis, a tariff policy will be developed to make the South Caucasus route competitive. Administrative procedures for transit goods will be simplified. These measures will increase transit trade.

474) The efficient operation of the Baku-Supsa pipeline has created a positive environment for the construction of the Baku-Tbilisi-Ceyhan (BTC) oil pipeline and Baku-Tbilisi-Erzerum (BTE) gas pipeline. These projects are of special importance in accelerating development and strengthening security.

475) A modern fully equipped centre to conduct research and testing will be established. It will conduct studies to monitor emergency conditions, to restore infrastructure of strategic importance as well as those damaged from earthquakes.

3.6.3. Industry

476) To realise industrial potential vital importance is assigned to integration into foreign markets. It is necessary to integrate into the international labour distribution system. To this end a number of measures will be carried out that to identify the industrial sectors with a comparative advantage.

477) The country wishes to increase exports. This should ensure the expansion of local production, increased employment, and competitiveness. The advantages granted from accession to the WTO should be applied in full.

478) To enhance the efficiency of large-scale state enterprises, they will be restructured, privatized or transferred under private management. The development of the stock market should facilitate the realization of surplus property of enterprises and the distribution of stocks more effectively. The reinforcement of corporate management will promote transparency of management. To improve management there will be an enhancement of quality control and improved financial control. The implementation of the so-called “Marshall Plan” will be continued through the Centre for Enterprise Restructuring and Management (CERMA).

3.6.4. Tourism

479) The impact of tourism on economic growth is rather wide and all-inclusive and has a direct and indirect nature. The direct impact involves an increase in public and budgetary revenue, employment, and the attraction of investment. Indirect impacts facilitate other economic development.

480) Short-term measures to develop tourism include:

• Market research of tourism and resort potential;

• State, non-commercial international advertising campaign;

• Inventory-certification of resorts;

• Creation of sanitary protection zones of resorts and resort zones;

• Attraction of private investment in tourism-resort business;

• Rehabilitation of infrastructure in priority resort zones;

• Simplification of border crossing procedures;

• Introduction and development of agro tourism;

• Creation and development of rescue-escort infrastructure;

• Training and retraining of professional staff for the sector;

• Development of conference tourism;

• Development of cultural, ecological and adventure tourism, arising from the interest of local communities and their involvement;

• Rehabilitation of historical and cultural monuments included in the Programme of Cultural Tourism and of other cultural institutions, creation of relevant infrastructure.

3.6.5. Agriculture and Food

481) To achieve efficiencies in the agriculture and food sector, administrative and institutional reform will be conducted. The Ministry of Agriculture and Food will be focused on three major trends:

• Formulating and implementing a sustainable policy for agriculture and the implementation of priority programmes;

• Public control on quality, utilization of agricultural resources, testing and protection of breeds, food security;

• Sector services including consultation, provision of information, scientific development and staff training.

482) Land reform will be completed, including privatization and the establishment of a land market; design and development of a unified geographic information system for land cadastre, associated natural resources and buildings. Developing the land market will help to introduce credit and insurance systems in rural areas with subsidised interest rates.

483) It is important to develop infrastructure in rural areas, industrial capacity, modernization and the use of advanced technologies. A major focus will be on export potential and import substitute sectors. Access to credit resources will be increased to benefit farmers and the processing industry. Taking into account the specificities of various regions, microfinance schemes will be tested on a pilot basis. Long and short-term credits will be introduced taking into account the seasonal nature of the sector. Vertical and horizontal cooperation of farmers and entrepreneurs will be facilitated, through incentives to improve cooperation in distribution and sales, as well as for capacity growth in processing. There will be a focus on small and medium agro-food enterprises.

484) Special attention will be made to rehabilitate irrigation and drainage systems, central facilities, mains and distribution channels and pumping stations. Several water supplier associations have already been formed in rural areas. This process will continue and these associations will operate irrigation systems. In addition, the state will retain its responsibility over the operation and maintenance of primary systems.

485) As agriculture depends largely on perennial plants, insurance mechanisms will be introduced to safeguard producers against rapid market changes and natural calamities.

4.1.1. Realistic Scenario

525) The realistic scenario is based on assumptions concerning the strengthening of economic reform, less-favourable endogenous and exogenous factors on the economic growth. It assumes a 5% average growth in GDP per annum. Based on this scenario, nominal GDP in 2005 will reach GEL 9.6 billion. This constitutes GEL 2,139 per capita.

526) In 2005, general government revenue will reach GEL 1.6 billion. General government expenditure will amount to GEL 1.8 billion.

527) By 2010, nominal GDP should equal GEL 15.6 billion, which is GEL 3,316 per capita.

528) In 2010, general government revenue will reach GEL 3.1 billion. General government expenditure will amount to GEL 3.5 billion.

529) By the completion of the programme, in 2015, nominal GDP should equal GEL 24.3 billion, which is GEL 4,900 per capita.

530) By 2015, general government revenues will reach GEL 5.6 billion. General government expenditure will amount to GEL 6.2 billion.

531) According to the realistic scenario, by the completion of the programme, nominal GDP will increase four times in comparison to 2001.

Table 1:

Realistic Scenario

Table 1:

Realistic Scenario

Realistic Scenario		2001	2002	2003	2004	2005	2010	2015
Real GDP growth (percent change)	1	4.5	5.4	4.8	4.5	4.0	5.0	5.0
Consumer Price Index (end of period, % change)	2	3.4	5.4	4.8	5.0	5.0	5.0	4.0
Nominal GDP (GEL million)	3	6,618	7,284	8,016	8,795.6	9,604.7	15,645.1	24,293.6
Real GDP (mln GEL in constant prices of 2001)	4	6,618	6,975.4	7,306.7	7,635.5	7,940.9	10,134.9	12,934.9
General government tax revenue (% of GDP)	5	14.4	14.8	16.0	16.5	17.0	20.0	23.0
General government tax revenue (GEL million)	6	951.5	1,076.0	1,284.1	1,453.0	1,634.7	3,132.0	5,592.2
General government expenditures (% of GDP)	7	18.3	18.2	18.8	19.0	19.3	22.8	25.5
General government expenditures (GEL million)	8	1,211.9	1,324.2	1,504.5	1,674.1	1,851.4	3,563.1	6,196.5
General government balance, commitments basis (% of GDP)	9	-2.0	-2.0	-0.6	-0.9	-0.9	-1.0	-1.0
General government balance, commitments basis (GEL million)	10	-130.0	-147.1	-47.9	-82.0	-82.5	-156.5	-242.9
Nominal GDP per capita, GEL	11	1,504.1	1,655.5	1,821.8	1,979.2	2,139.9	3,316.5	4,899.9
Real GDP per capita, GEL	12	1,504.1	1,585.3	1,660.6	1,718.2	1,769.2	2,148.4	2,608.9

View Table

Table 1:

Realistic Scenario

Realistic Scenario		2001	2002	2003	2004	2005	2010	2015
Real GDP growth (percent change)	1	4.5	5.4	4.8	4.5	4.0	5.0	5.0
Consumer Price Index (end of period, % change)	2	3.4	5.4	4.8	5.0	5.0	5.0	4.0
Nominal GDP (GEL million)	3	6,618	7,284	8,016	8,795.6	9,604.7	15,645.1	24,293.6
Real GDP (mln GEL in constant prices of 2001)	4	6,618	6,975.4	7,306.7	7,635.5	7,940.9	10,134.9	12,934.9
General government tax revenue (% of GDP)	5	14.4	14.8	16.0	16.5	17.0	20.0	23.0
General government tax revenue (GEL million)	6	951.5	1,076.0	1,284.1	1,453.0	1,634.7	3,132.0	5,592.2
General government expenditures (% of GDP)	7	18.3	18.2	18.8	19.0	19.3	22.8	25.5
General government expenditures (GEL million)	8	1,211.9	1,324.2	1,504.5	1,674.1	1,851.4	3,563.1	6,196.5
General government balance, commitments basis (% of GDP)	9	-2.0	-2.0	-0.6	-0.9	-0.9	-1.0	-1.0
General government balance, commitments basis (GEL million)	10	-130.0	-147.1	-47.9	-82.0	-82.5	-156.5	-242.9
Nominal GDP per capita, GEL	11	1,504.1	1,655.5	1,821.8	1,979.2	2,139.9	3,316.5	4,899.9
Real GDP per capita, GEL	12	1,504.1	1,585.3	1,660.6	1,718.2	1,769.2	2,148.4	2,608.9

4.1.2. Optimistic Scenario

532) Optimistic scenario is based on the assumptions concerning the fostering of economic reform and the favourable influence of endogenous and exogenous factors on economic growth. Under this scenario GDP growth per annum will average 8%. According to this scenario, nominal GDP in 2005 will reach GEL 10 billion. This will constitute GEL 2,233 per capita.

533) In 2005, general government revenue will increase to GEL 1.7 billion. General government expenditure will amount to GEL 1.9 billion.

534) By 2010, nominal GDP should equal GEL 18.8 billion, which is GEL 3,984 per capita.

535) In 2010, general government revenue will reach GEL 3.9 billion. General government expenditure will amount to GEL 4.4 billion.

536) By the completion of the programme, in 2015, nominal GDP should equal GEL 33.6 billion, which is GEL 6,777 per capita.

537) In 2015, general government revenue will reach GEL 8.4 billion. General government expenditure will amount to GEL 9.2 billion.

538) According to this scenario, by the completion of the Programme, nominal GDP will increase five times in comparison to 2001.

539) The parameters in both scenarios may increase during the lifecycle of the programme. Over the next few years, significant investment is anticipated to derive in connection with the construction of the Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Erzerum oil and gas pipelines. During 2003–2006, US$ 515 million should be invested in constructing the oil pipeline, and during 2003–2005, US$ 500 million should be invested in the gas pipeline construction.

540) The operation cost of Baku-Tbilisi-Ceyhan oil pipeline will be on average US$6.5–12.4 million, which will be covered by oil companies. The tariff revenues from the transported oil will be US$112 million in the years 2005–2008 and US$360.1 million in the years 2009–2015. Over the 40-year life of pipeline the total budget revenues for Georgia will amount to US$2.5 billion or US$62.5 million per annum on average. Moreover, Georgia will receive other important social and economic benefits, such as:

• 80% of employment will consist of local staff

• The construction will primarily use local building materials and equipment

• The orders placed on Georgian industry will amount to tens of millions of dollars

541) During the whole construction period, 60% of all cargo for the implementation will go through Poti and Batumi, railways, motor and air transport. Revenue per ton of cargo is US$ 8–10.

Table 2:

Optimistic Scenario

Table 2:

Optimistic Scenario

Optimistic Scenario		2001	2002	2003	2004	2005	2010	2015
Real GDP growth (percent change)	1	4.5	5.4	5.0	6.0	7.0	8.0	8.0
Consumer Price Index (end of period, percent change)	2	3.4	5.4	4.8	5.0	5.0	5.0	4.0
Nominal GDP (GEL million)	3	6,618	7,284	8,016	8,921.8	10,023.7	18,797.1	33,602.9
Real GDP (mln GEL at constant prices of 2001)	4	6,618	6,975.4	7,324.1	7,763.6	8,307	12,205.8	17,934.3
General government tax revenue (percent of GDP)	5	14.4	14.8	16.0	16.5	17.0	21.0	25.0
General government tax revenue (GEL million)	6	951.5	1.076	1,284.1	1,473.8	1,705.9	3,951	8,407.2
General government expenditure (percent of GDP)	7	18.3	18.2	18.8	19.0	19.2	23.6	27.4
General government expenditure (GEL million)	8	1,211.9	1,324.2	1,504.5	1,695.8	1,926	4,443.8	9,194
General government balance, commitment basis (percent of GDP)	9	-2.0	-2.0	-0.6	-0.9	-0.8	-1.0	-1.0
General government balance, commitment basis (GEL million)	10	-130.0	-147.1	-47.9	-81.6	-81.8	-188.0	-336.0
Nominal GDP per capita, GEL	11	1,504.1	1,655.5	1,821.8	2,007.6	2,233.2	3,984.6	6,777.5
Real GDP per capita, GEL	12	1,504.1	1,585.3	1,664.6	1,747	1,850.8	2,587.4	3,617.2

View Table

Table 2:

Optimistic Scenario

Optimistic Scenario		2001	2002	2003	2004	2005	2010	2015
Real GDP growth (percent change)	1	4.5	5.4	5.0	6.0	7.0	8.0	8.0
Consumer Price Index (end of period, percent change)	2	3.4	5.4	4.8	5.0	5.0	5.0	4.0
Nominal GDP (GEL million)	3	6,618	7,284	8,016	8,921.8	10,023.7	18,797.1	33,602.9
Real GDP (mln GEL at constant prices of 2001)	4	6,618	6,975.4	7,324.1	7,763.6	8,307	12,205.8	17,934.3
General government tax revenue (percent of GDP)	5	14.4	14.8	16.0	16.5	17.0	21.0	25.0
General government tax revenue (GEL million)	6	951.5	1.076	1,284.1	1,473.8	1,705.9	3,951	8,407.2
General government expenditure (percent of GDP)	7	18.3	18.2	18.8	19.0	19.2	23.6	27.4
General government expenditure (GEL million)	8	1,211.9	1,324.2	1,504.5	1,695.8	1,926	4,443.8	9,194
General government balance, commitment basis (percent of GDP)	9	-2.0	-2.0	-0.6	-0.9	-0.8	-1.0	-1.0
General government balance, commitment basis (GEL million)	10	-130.0	-147.1	-47.9	-81.6	-81.8	-188.0	-336.0
Nominal GDP per capita, GEL	11	1,504.1	1,655.5	1,821.8	2,007.6	2,233.2	3,984.6	6,777.5
Real GDP per capita, GEL	12	1,504.1	1,585.3	1,664.6	1,747	1,850.8	2,587.4	3,617.2

5.3.1. Basic Principles

561) The system of monitoring and evaluation of the Economic Development and Poverty Reduction Programme is based on the following principles:

• Integration of the system with state decision-making processes: working out and introduction of feedback mechanisms;

• Broad dissemination of and accessibility to the results of monitoring and assessment;

• Adaptation of information to various categories of users, e.g.: policy makers, programme implementers, programme beneficiaries, general public, mass media, academia, representatives of civil society, donor organizations, etc.;

• Tools of dissemination: modern information and communication technologies (for example Internet), publications (brochures, periodicals), presentations at face-to-face meetings;

• Ensure the participation of civil society in the monitoring and evaluation system (see section 5.4.3.2.2 Participation in Monitoring and Evaluation, on page 72).

562) Monitoring and evaluation of the EDPRP implementation and preparation of the MDG report will form two concurrent and interconnected processes. This will avoid the creation of parallel structures and allow the sharing of accumulated expertise and statistical information/data. This approach will maximize country ownership and efficiency of both processes. Relevant stakeholders (civil society, academia, media, donors and business) other than the state authorities will also be actively involved in these processes.

563) Monitoring and evaluation of the programme is an open process. The Bureau will ensure:

• Methodological support (in order to apply uniform instruments for data compatibility);

• Dissemination of the results of monitoring and evaluation;

• Strengthening of the technical capacity for monitoring and evaluation, definition of specific research needs;

• Feedback between the monitoring and evaluation system and the decision-making process.

564) Civil society will have unrestricted freedom to take part in the measurement and assessment of the implementation process and its outcomes, collect data independently (both quantitative and qualitative), draw conclusions, propose recommendations, and influence the decision-making process at its own discretion and capacity. This can be achieved in the following ways:

• Independently—through direct liaison with decision-makers using common schemes of institutionalized participation (e.g. through involvement in local government or parliament);

• Consolidation—by contributing to the system of monitoring and evaluation, through liaison with the Bureau.

5.3.2. Arrangement of the System

565) The purpose of the Monitoring and Evaluation System of the programme implementation is twofold:

• To assess progress in implementation of the measures envisaged by the programme by means of interim indicators;

• To facilitate revision of the objectives envisaged by the programme using final indicators (of outcome and impact);

566) Due to functional and organizational specificity, the system of monitoring and the system of outcome/impact assessment are discussed separately below.

5.3.3. Indicators and Targets

577) The selection of poverty reduction and economic development indicators was the main topic of discussion between the government and civil society at the initial stage of the participatory process. The indicators of poverty assessment and reduction were the key subject matters. These discussions improved the conceptual understanding of poverty for both the government and civil society.

578) The following aspects were taken into consideration when selecting the indicators:

• International practice (typology of indicators);

• Specificities of poverty in Georgia;

• Accessibility, reliability and difficulty (both technical and financial) in obtaining data to measure the indicators;

• Sensitivity and specificity of the indicators.

579) A complete list of the indicators, sources, official structures responsible for data collection, and the frequency (periodicity) of measurement are given in a separate table (see Annex 2 on page 82)

580) The process and outcome indicators will be disaggregated according to the following principles:

• 1. Geographic:

  • 1.1. Administrative units (region, district, municipality);

  • 1.2. Geographic-climatic zones (high mountainous/plains, types of soil, agrarian and non-agrarian districts, etc.).

• 2. Demographic and social:

  • 2.1. Gender;

  • 2.2. Age groups;

  • 2.3. Economic status;

  • 2.4. Specific social categories;

  • 2.5. Forcibly displaced persons.

• 3. Income, consumption, poverty:

  • 3.1. Income and consumption quintiles;

  • 3.2. Households below and above the poverty line.

5.3.4. Introduction of the Monitoring and Evaluation System

581) When introducing the monitoring and evaluation system, efforts will be made in two directions:

• Reinforcement of coordination and institutionalization of monitoring-assessment: usage of existing experience and capacity of data-collection and assessment for the purpose of monitoring and evaluation of the EDPRP, integration of civil society participation into this process;

• Reinforcement of capabilities for comprehensive monitoring and evaluation: standardization of the monitoring and evaluation methodology (techniques, instruments), introduction of impact assessment methodology and its integration in the decision-making process.

582) Together with the State Department of Informatization, a conceptual framework for the information system of the monitoring and evaluation management of the programme will be devised. Step-by-step computerization of the system will be conducted on the basis of this framework.

583) The Bureau will:

• Issue special methodological guidelines on registration, initial processing, data verification, and the format and periodicity of the supply of data to central and local government bodies;

• With the SDS, determine standard modules and sampling criteria for quantitative surveys of households to be used by any government or non-government entities while conducting independent surveys. This will enable civil society to participate and contribute to monitoring and evaluation with greater efficiency.

• With donor organizations, elaborate measures to introduce impact assessment systems, and with external technical assistance, make assessments to transfer experience and capacities to local institutions at the same time.

5.4.1. Vision

584) Public participation in the preparation, revision and implementation of the Economic Development and Poverty Reduction Programme is not an end in itself. It represents an instrument to attain certain objectives. These are:

• Engender confidence and support of the population towards the programme and generate a sense of ownership;

• Improve the quality and viability of the programme;

• Enhance the sustainability and efficiency of the programme’s implementation.

585) The government has designed the programme for and together with society. The programme should make a discernible difference to people’s lives. It is, however, difficult to change people’s life for the better unless they have full confidence in the proposed measures and approaches. It is even more difficult to preserve success, unless the programme is supported by society. Support comes only after trust. Society needs to understand what the programme proposes, what are their responsibilities and what changes and benefits are promised. While it may be difficult to comprehend this complex document fully, it is feasible and necessary to communicate it in the right way to each citizen. The Communication Strategy is targeted with this in mind.

586) The government is responsible for the elaboration of the programme. However, the programme is not designed solely for the government. It addresses the problems facing the country. These problems concern everybody, especially the poor and vulnerable citizens. They cannot be understood only from the government’s standpoint. To find solutions to the problems is not easy. Seeking solutions is the responsibility of everybody, both government and civil society. The way to solve the problems will only happen by sharing experience and knowledge, and reconciling ideas. In the attempt to find the best way, some questions might be left unanswered; others might need to be revised after a certain period of time. The programme is not designed for one day. It is a live document, because society continues to seek ways to resolve problems. It develops, learns lessons, and finds better ways to attain those goals. The programme has been designed in this way and needs to be considered as valuable, viable and effective. Public participation in the preparation and implementation of the programme serves these objectives.

587) The Programme addresses the country’s problems and covers the entire strata of society. The problems and ways to solve them are not abstract. The problems cannot be resolved only in the corridors of government, or solely by government activity. The majority of the issues exist around us—in the environment we live in: villages and cities, residential areas and offices. Resolution of these problems and taking concrete actions is a civic duty, and no one else can do it better than society. The scope of operation of the programme refers to all the segments of society. The programme requires actions on-site. The economy cannot develop and the poverty cannot be reduced in the abstract. The programme specifies the measures to resolve problems on-site. Carrying out these measures is the responsibility of citizens and local governments. These measures cannot be realized without civic activity. The programme will be productive and sustainable when the plans are fulfilled jointly at the government level and on the ground. Assignment of the measures in the programme is not sufficient for actions to be undertaken at the grassroots levels. To ensure public participation in the programme’s implementation, it is necessary to secure different levels of public awareness and partnership between civil society and local government bodies and to discern methods to share authority and responsibility. The Strategy for Public Participation in Governance serves this objective.

5.4.2. Communication Strategy

5.4.3. Public Participation

591) The strategy consists of two stages (sub-strategies) and will be discussed below separately:

• The first stage aimed to ensure the effective participation of civil society in programme’s preparation of (past stage);

• The second phase aims to institutionalize civil society participation in the programme’s implementation and maintain its viability (future stage).