Speech

The Challenges of Building a Modern Georgian Economy

June 12, 2017

Thank you, Mr. Sharvashidze, for your kind introduction. It is an honor to visit Georgia. And it is an honor to be able to spend time today at Tbilisi State University

Mr. Governor, Mr. Minister, it is important to come together to discuss the challenges of building a modern Georgian economy. I always take great pleasure meeting with students during my work. This group represents Georgia’s future and should have a voice in today’s discussion.

Your country has made great economic progress since achieving independence, and recent reforms have laid the foundation for continued advances.

I think there is broad agreement on the issues to be addressed if Georgia is to achieve the sustained economic growth that will benefit all Georgians.

It won’t be long before many of these challenges rest on your shoulders. When you leave university, you will be taking on responsibilities that, in time, will help determine your country’s future.

So, I would like to outline some of these issues today.

Let me begin with a brief overview of the global economy since that will always have such an important bearing on your country’s prospects. Then I will turn to Georgia’s recent economic performance, before looking to the future.

Global and Regional Outlook

The IMF recently upgraded its forecast for world growth to 3.5 percent this year and 3.6 percent in 2018. That is up from 3.1 percent in 2016.

We are seeing stronger growth in the U.S., Europe and Japan, after almost a decade of disappointing growth. Emerging market and developing countries also are experiencing more solid growth, with commodity prices recovering after the sharp downturn of 2015. Russia is showing signs of rebounding from its recession.

Among the immediate global risks, the U.S. Federal Reserve continues to raise interest rates at a steady pace. This raises the possibility of tighter financial conditions and even potential market volatility. This calls for vigilance by Caucasus countries that are more open financially.

Another issue is uncertainty about China’s economic rebalancing effort. Beijing’s shift toward domestic demand as primary source of growth, and its attempts to strengthen China’s financial system, will be good for China and the world alike in the long run. But the process is so complex and not without risks. We saw this in the 2015 financial market volatility that hit global markets, for example.

In this part of the world, the Caucasus are seeing a fragile recovery after last year’s slowdown. Overall, there is a legacy of public debt and weak financial systems. It is important that governments address these issues.

The IMF projects that Georgia will grow about 3.5 percent this year, up from an average of 2.8 percent over the past two years. This is largely supported by investment and private consumption.

In the medium term, we see Georgia returning to the 5.5 percent growth after the recent downturn. But that will depend on the continuation of recent policies that have created favorable conditions for private investment, productivity growth, and greater export competitiveness. The environment for doing business is also improving—as the World Bank recently stated.

Georgia’s Challenges

What are some of the key challenges facing Georgia? Let me highlight three:

First, is the narrow export base. Traditional agriculture and established industries such as metals will not be enough to support Georgia’s exports in a rapidly changing global economy. New sectors are emerging, especially tourism and transportation. But you are competing against countries that are pursuing the same goal.

Recent free trade agreements should help to boost economic diversification by opening new markets. But that alone won’t be enough. Mobilizing domestic savings to boost investment will also be important to support more balanced growth.

The second challenge is in the job market, where unemployment and under-employment remain at high levels. Almost half of your country’s labor force is engaged in agriculture. Too many people are counted among the long-term unemployed.

This problem contributes to the wide inequality in Georgian society. Further reforms are needed to promote more inclusive growth.

As the economy continues to evolve, this problem will become more complicated.

What is required is a serious government effort, perhaps including improved job-search and job-matching services.

In addition, the social safety net should be preserved to protect the poor, the elderly, and vulnerable. This includes those who are at risk of falling behind because of structural changes in the economy.

Georgia in the New Economy

The employment issue also highlights the third challenge your country faces: a serious mismatch of skills in the job market.

Let’s take a step back to look at this problem. The world of work is changing at lightning speed. Technology is evolving, and new business models are emerging.

New job skills are in high demand. That means that schools must be able to cultivate the labor force of the future in every country. It also means that the workplace must be constantly upgraded to meet the demands of innovation.

Georgia is also facing this challenge—as I’m sure many of you know very well. Georgian companies that are trying to make it in the new economy say their biggest obstacle to growth is finding workers with the right skill set.

What is needed is a continued effort to build up an educational system that can help meet this demand. This calls for improving the quality of primary and secondary education, including the introduction of vocational training. It also might involve setting curriculum and teacher performance standards.

Improved education also means more students going to university to receive degrees aligned with the needs of the new economy. And it means a well-developed adult learning program.

Conclusion

In conclusion, your generation will be called upon to integrate Georgia into the global economy in ways that we can barely imagine today. You will face the challenges of international integration and competition.

You will play a key role in building Georgia’s future. Some of you will be become business leaders. Some will join the government. (Maybe a few of you will become economists at the IMF.)

Whatever you end up doing, know that you will have great responsibilities to your countrymen who have not had the same opportunities you now enjoy. Use these opportunities wisely. Thank you!