56810 FAST TRACKBRIEF June 30, 2008 The IEG report "Georgia Country Assistance Evaluation, 1993-2007," was discussed by CODE on June 30, 2008 Georgia Country Assistance Evaluation, 1993- 2007 Georgia's development path was highly uneven after the country gained independence in 1991. Civil war, secessionist movements, and economic crises resulted in a sharp and protracted fall in output and hyperinflation in the immediate post-independence years. In 1994-96 the country implemented a successful stabilization program, reining in hyperinflation and restoring growth. But in subsequent years the government failed to overcome problems arising notably from economic mismanagement and widespread corruption, leading to poor public services, a deepening energy crisis, and political and economic uncertainty. After the November 2003 Rose Revolution, the new government executed an ambitious reform program that quickly produced results: rapid economic growth, improved governance, and better living conditions. During 1994-2007, total IDA lending commitments to Georgia amounted to $940 million (49 credits). These focused on four broad areas, or "pillars": macroeconomic stabilization and public sector reform; governance; private sector development and growth; and human, social, and sustainable development. Analytic and advisory activities were relevant, of high quality, and well-connected to the lending program. Three distinct sub-periods are evident in Georgia's development program: (i) 1994-97, characterized by macroeconomic stabilization and resumption of growth; (ii)1998-2003, when the early gains in restoring macroeconomic stability were marred by widespread corruption, a poor business climate, and weak implementation capacity; and (iii) 2004-07, a period of reforms that resulted in faster economic growth, better living conditions, and an improved business climate. During the initial years (1994-97) the Bank's assistance was relevant and well-targeted and contributed to stabilizing the economy. The approach in subsequent years (1998-2003) of piecemeal lending in many sectors stretched IDA resources and weakened interventions in important areas. The Bank scaled down its engagement in 2002-03 as the governance environment continued to deteriorate, but then quickly boosted its support after the reformist government took office in 2004; thereafter, Bank support to the country's development agenda was generally effective. The overall outcome of Bank assistance in Georgia over the 15-year review period is rated moderately satisfactory (an aggregate rating across the four pillars over all three sub-periods). With Georgia now on the path to IDA graduation and becoming eligible for IBRD borrowing, the challenge for the Bank is to sustain a strong partnership with an emerging middle-income country. This will require keeping flexibility to respond to client demand in the definition of its program of lending and analytical and advisory services, with a focus on its established areas of expertise that also have a direct bearing on Georgia's development challenge: sustaining growth while ensuring its fruits are more equitably distributed. Country Background After gaining independence from the Soviet Union in Union--was followed by the catastrophic lows of 1991, Georgia followed a development path that saw fratricidal civil war, secessionist movements, economic many ups and downs. An initial period of high destruction, and an inflow of hundreds of thousands of expectations--as Georgia was among the most refugees (1992-94). Between 1989 and 1994 GDP fell by prosperous and strategically located parts of the Soviet almost three-quarters, annual inflation reached 15,600 percent, and industrial output fell by more than half. Key Findings of the Evaluation Nevertheless, after implementing a stabilization program Pillar I: Macroeconomic Stabilization and Public in the mid-1990s, the country showed signs of recovery: Sector Reform: The outcome of the Bank's program for hyperinflation disappeared, and growth resumed--only to Pillar I over the entire review period is rated moderately start sliding downward again toward the end of the satisfactory. Bank support was effective early on (1994-97). decade. The government failed to overcome problems The stabilization program produced the desired results: associated with economic mismanagement, crony hyperinflation was eliminated and the economy averaged an capitalism, and widespread corruption and was slowly annual growth rate of about 8 percent. As a result of the losing control over the country. Daily life was marred by initial success, however, the pressure and urgency to reform corruption, poor public services, a severe energy crisis, abated during 1998-2003. The macroeconomic situation and political and economic uncertainty. Yet, against all remained stable, but GDP growth slowed to about 5 odds, the country rebounded in a spectacular manner after percent per year. Government revenues fell sharply due to the November 2003 Rose Revolution that brought to poor tax collection and a slowdown in privatization. In the power a team of reformers. The new government rapidly period after the Rose Revolution (2004-07), two important executed an ambitious reform program that quickly results stand out: the increase in tax revenues, from 14.1 produced results. In 2007 Georgia's GDP grew 12 percent of GDP in 2003 to 24.9 in 2007, and the rapid percent, and GNI per capita was about $1,920 (Atlas privatization of large companies that brought in revenues method). This last chapter took a sudden turn in equivalent to about 10 percent of GDP. Growth recovered November 2007, when a political crisis triggered early and capital inflows increased significantly, the latter presidential elections (January 2008). While the immediate mirrored in a widening of the current account deficit and impact on growth and reform appears to have been increased pressure on domestic prices. marginal, the longer-term consequences of the protracted political confrontation remain unclear, and progress will Pillar II: Governance: The overall outcome of the depend on the country's ability to resolve it. Bank's program for Pillar II for the entire review period is rated moderately unsatisfactory. The Bank sought to help World Bank Support improve governance by targeting three areas: anti- The World Bank's experience in Georgia closely followed corruption, public financial management, and judicial the successes and failures of the country's development. reform. Initially, Bank support focused mainly on public Three distinct sub-periods can be identified, based on the financial management, with some early positive results, timing of the Bank's country strategies, changes in notably better tax collection. However, enforcement of government policy course, and exogenous factors: 1994- newly-enacted reforms was weak, and the momentum for 97, 1998-2003, and 2004-07. further reform dwindled. Tax collection remained low until 2004. Corruption was rampant. Bank-financed Georgia joined the Bank in 1992. Political stabilization in rehabilitation of court infrastructure and training of judges late 1993-early 1994 opened the way for launching an did not translate into improved public trust and judicial assistance program. All three of the Bank's country strategies independence. The situation turned around following the during the review period (1995, 1997, and 2005) had similar 2004 change in government. Revenue collection increased objectives and sought to achieve results in four areas, or and arrears in pensions and salaries were cleared. A pillars: macroeconomic stabilization and public sector successful anticorruption campaign was implemented, reform; governance; private sector development and growth; leading to a significant amelioration in corruption and human and social development. Overall, the objectives perception indices. Progress in the specific areas of were relevant in that they tried to address the main problems judicial reform supported by the Bank was less evident, affecting Georgia. The Bank provided about 22 percent of and judicial independence remains a serious concern. total donor assistance, with total IDA lending commitments of $940 million over the review period. The lending program Pillar III: Private Sector Development and Growth: The covered many areas: economic policy, public sector overall outcome of the Bank program for Pillar III over the governance, transport, energy, health, education, urban entire review period is rated moderately satisfactory. Bank development, agriculture, social protection, private sector assistance was effective, except during 1998-2003. During development, environmental protection, and cultural 1994-97 almost all small and medium enterprises were heritage and tourism. The Bank's analytic and advisory privatized, banking sector assets grew, a Central Bank Law activities (AAA) were generally relevant, of high quality, and was adopted, and privatization and registration of land well-connected with the lending program. advanced. This progress notwithstanding, unreliable energy supply and limited access to credit continued to constrain private sector development. During 1998-2003, many aspects of the business environment continued to deteriorate. Large-scale privatization virtually stopped. The 2 electricity sector teetered on the brink of collapse owing to took control in 2004. The Bank quickly recognized the high technical and commercial losses, low tariff collection potential for change and extended its financial support rates, and widespread corruption. Access to credit continued and advisory services to the new government. With few to be limited. Growth, productivity, and exports in exceptions, the Bank's lending and AAA work was timely, agriculture, the largest sector of the economy, were stagnant. well-targeted, and effective. Overall, the outcome of World Again, a turnaround is evident after 2004. Privatization of Bank support to Georgia--aggregating all four pillars over state-owned enterprises proceeded rapidly. The business the three sub-periods--is rated moderately satisfactory . climate improved significantly. Electricity supply improved and is now close to uninterrupted. Road conditions Lessons improved, driving transportation costs down. There are, of Several lessons (conclusions with potentially broader course, continuing challenges: despite some growth in applicability to other country programs) emerge from the exports, unresolved issues remain in agriculture; in review of the Bank's Georgia program since its inception particular, access to credit for farmers and sustainability of in the early nineties. In the main, these lessons confirm the irrigation system. And despite the major improvements extant wisdom, although one--on the potential for rapid in the business climate more generally, protection of private successes in addressing corruption--is more unique to the property rights remains in need of strengthening. Bank's experience in Georgia. Pillar IV: Human, Social, and Sustainable In the absence of government commitment, external Development: The outcome of the Bank program for support cannot buy reforms and may, in fact, have Pillar IV over the entire review period is rated moderately the perverse effect of delaying them. The Bank satisfactory. During 1994-97, the decline in living standards overestimated the government's willingness to reform in and rise in poverty slowed but were not reversed. Among the late 1990s and continued lending despite clear other difficulties, the Government did not succeed in indications of spreading corruption and declining central collecting enough revenues and was having difficulty government capacity. Its piecemeal lending in a large meeting its social transfer obligations. Poverty increased number of sectors may have obscured major issues, but during 1998-2003, affecting about 50 percent of the more importantly its continued support may have population. Health indicators and the quality of health strengthened the capacity to postpone necessary reforms. services also did not improve during that period. The It is possible to address successfully even the most sector was underfinanced and inefficiencies were rampant. pervasive and entrenched corruption when the In education, corruption was widespread, and bribes (e.g., government has the public mandate, political will, and to circumvent entrance requirements) were a common capacity to do so. Georgia's experience demonstrates practice, especially in higher education. Public spending convincingly that results­notably in the form of more on the social sectors in general remained low. The Bank's favorable perceptions--can be achieved quickly. External work at the municipal level to help improve basic support can help, but is not decisive. Supporting specially- infrastructure and quality of local services resulted in designated anti-corruption structures (commissions, positive gains for communities, although their councils, etc.) is not an institutional prerequisite for a sustainability was an issue due to financial insolvency at successful anti-corruption campaign. Judicial independence the local level. Once again, there was a significant is a political issue that calls for political remedies, which are turnaround after 2004. Poverty declined, albeit slowly, and generally outside the Bank's mandate, and upgrading a well-designed social assistance targeting mechanism was hardware is of little use if the objective is judicial introduced. Health status indicators generally remained independence. stagnant, but steps were taken to increase efficiency in the sector. Improvements also took place in education. A Small-scale investments, combined with institution new, transparent system of university entrance exams was building at the local level, can produce results even in introduced, virtually eliminating corruption. Access to the presence of poor governance and limited central municipal services and local capacity to manage them government capacity. In Georgia, the Municipal improved in several municipalities. Development Fund (MDF) was able to continue its activities and achieve tangible gains when the central To summarize, Bank lending was relevant and well- government was all but paralyzed. targeted in the initial period of stabilization (1994-97) and, combined with good-quality policy advice, played an important role in the successful stabilization of the Recommendations Georgia has seen impressive gains under very difficult economy. The later approach of piecemeal lending in conditions in recent years, and is today well-placed to virtually all sectors (1998-2003) stretched the scarce IDA resources, weakening interventions in important areas. continue on a path of development towards greater prosperity. Nevertheless, the country's development The situation changed after the reformist government 3 agenda is not without its challenges, notably the dual physical investment, particularly where these have challenge of sustaining economic growth while also "demonstration" value, potential for scaling up, and/or ensuring its greater inclusiveness in order to reduce impact on poverty or employment creation among low- poverty (especially in the rural areas) and reverse widening income groups. To support institution-building, the Bank inequality. The agenda is a complex one that calls for should ensure that new investment operations do not lead attention to many areas, including continued attention to to the establishment of additional ad hoc project areas--such as governance and private sector implementation units, but rather help the relevant development--where the country has made great strides government structures take on project management in recent years. responsibilities. As Georgia moves closer to "graduation" from IDA and Analytical and Advisory Activities: The selection of formal officially becomes eligible for IBRD financing beginning AAA, whether self-standing or complementary to (planned) in FY09, the challenge for the Bank is to adapt its role as a lending, should also be driven by client demand. Given the development partner to the country. To a large extent, strong demand for policy advice, the selection of AAA will the required shift has already been taking place in the past likely include topics on which the client country authorities few years, against a backdrop of steady erosion in IDA's face imminent decisions and consider alternatives when traditional place as a primary source of budget and balance making recommendations. In addition, the Bank would be of payments financing, towards a middle-income country well-advised to maintain some "space" in its informal AAA partnership with the Government firmly in the driver's program in order to maintain and update its knowledge or seat and client demand driving the Bank's program. keep a watching brief on other areas which, while central to Georgia's development agenda, may not immediately be Looking forward, IEG has the following covered in lending or formal AAA. recommendations: General. That the Bank continue consolidating and codifying the demand-driven nature of its program, with the choice of its lending and AAA activities kept flexible About Fast Track Briefs in order to respond to client demand, subject to two Fast Track Briefs help inform the World Bank Group (WBG) broad criteria--which are unlikely to be confining--on managers and staff about new evaluation findings and the areas of focus. The first is that these should be central recommendations. The views expressed here are those of IEG to Georgia's development agenda, specifically the dual and should not be attributed to the WBG or its affiliated challenge of sustaining economic growth while ensuring organizations. Management's Response to IEG is included in that the fruits of growth are more equitably distributed, the published IEG report. The findings here do not support any particularly in favor of the poor. The second is that the general inferences beyond the scope of the evaluation, including areas of focus should be within the Bank's established any inferences about the WBG's past, current or prospective fields of expertise, such that it can realistically mobilize the overall performance. skills needed to respond to client demand. Beyond this, the Bank will need to ensure that its lending and AAA remain selective. The client perspective would ensure The Fast Track Brief, which summarizes major IEG complementarity with other development partner support, evaluations, will be distributed to selected World Bank Group although the country may initially require assistance with staff. If you would like to be added to the subscription list, please the relatively complex task of coordination among email us at ieg@worldbank.org, with "FTB subscription" in development partners. Finally, the Bank should consider the subject line and your mail-stop number. If you would like joint work that involves other World Bank Group to stop receiving FTBs, please email us at ieg@worldbank.org, institutions--IFC and MIGA--where such work can with "FTB unsubscribe" in the subject line. provide a more complete set of services to the client. Lending: Within the areas of focus identified by the client, Contact IEG: given Georgia's relatively advanced state of development, Director-General, Evaluation: Vinod Thomas lending operations--either in the form of development Director: Cheryl Gray (IEG-WB) policy lending or project lending--would best be geared Manager: Ali M. Khadr (IEGCR) towards building or strengthening systems, institutions, and Task Manager: Konstantin Atanesyan (IEGCR) associated technical capacity (i.e., predominantly "software"), including, for example, monitoring and Copies of the report are available at: evaluation (M&E) systems in order to enhance transparency http://www.worldbank.org/ieg/cae and accountability. This need not, of course, rule out IEG Help Desk: (202) 458-4497 investment projects that are predominantly geared towards E-mail: ieg@worldbank.org 4