The paper explains the behavior of inflation in Georgia in the post-stabilization period. A long-run equation linking prices to money and the exchange rate, as well as a short-run, dynamic equation for inflation are estimated. The inflation equation is stable, points to a dominant role of the exchange rate in the behavior of inflation and shows a low persistence of inflation in Georgia. The equation explains well the behavior of inflation after the Russian crises, when inflation increased sharply but was quickly brought under control, as the National Bank of Georgia kept its monetary policy tight and the exchange rate stable.
Building on the substantial progress made in establishing fiscal systems consistent with market economies, the paper identifies priorities for further fiscal structural reforms among the Commonwealth of Independent States (CIS) countries. Activities of extra budgetary accounts and quasi-fiscal activities need to be brought into the budget framework. Although there is room for improvements, the CIS countries now have, broadly, levels of tax revenues and expenditures not out of line with the international norm, taking into account income levels. The main challenges they face are to further increase the market friendliness of taxation and to implement an efficiency-improving structural reform of the expenditure system while strengthening control and accountability.
The book is published by Open Society Institute.
This paper analyzes developments in the structure of trade in the Commonwealth of Independent States (CIS) during the transition decade, and finds that it changed less than in other transition economies. Trade openness of the CIS increased between 1993 and 1997, but has fallen to a lower-level plateau since then owing to regional and country-specific factors. These include slower progress in transition, geographic aspects, restrictions on trade, governance and corruption problems, weak infrastructure, lack of regional cooperation, and political conflicts. Regression results show that trade openness of the CIS countries would likely increase substantially if market-oriented reforms were pursued more vigorously.
This paper documents the great divide in the level of financial development between the Commonwealth of Independent States (CIS) 7 countries and the more advanced economies in transition, in particular those of Central and Eastern Europe and Baltic states. It discusses the roots of financial underdevelopment in the CIS-7 countries by examining the differentials in interest rate spreads between the CIS-7 countries and the transition economies that have achieved faster financial development. The roots of the divide are traced to weaknesses in the institutional infrastructure for financial intermediation, which lead to a combination of low depositor trust in the banking system and high credit risk. High credit risk stems mainly from the poor creditor-rights protection and weak auditing and accounting standards. Financial sector reform strategies that fail to give priority to the resolution of weaknesses in the basic financial infrastructure are unlikely to be successful in letting the CIS-7 countries bridge the great divide.
Monetary policy has become increasingly important in the countries of the Commonwealth of Independent States (CIS) as fiscal adjustment and structural reforms have taken root. Inflation has been brought down to relatively low levels in almost all of these countries, raising the question of what should be the appropriate nominal anchor at this stage. Formally, almost all CIS countries have floating exchange rate regimes, yet in practice they manage their exchange rates very heavily, perhaps because of high levels of dollarization (i.e., they suffer from "fear of floating"). This paper explores the issues underlying the choice of a nominal anchor in CIS countries and seeks to assess whether the present mixed regime will prove durable.
Starting in the early 1990s, the Baltics, Russia, and other (BRO) countries of the former Soviet Union initiated tax reforms that varied widely at the later stages. Recently, some of the BRO countries, basing decisions on the proposition that lowering of the top marginal income tax rate would significantly benefit economic development and increase tax compliance, have initiated a new stage of tax reforms. This paper reviews country experiences and suggests that (i) overall, there seems to be little evidence of a substantial improvement in income tax revenues resulting simply from a reduction in the top marginal tax rates, and (ii) in the BRO countries, the elasticity of the behavior of economic agents, in terms of labor supply, saving, and investment, with respect to income tax rates is not large, and a reduction of the existing income tax rates is unlikely to lead to a notable expansion of economic activity.
In the past few years the informal sector in countries in transition has increasingly become the focus of research, public policy and the media. The term 'informal sector' has been used to describe an extremely wide spectrum of activities, which do not necessarily have much in common, such as tax evasion, corruption, money laundering, organized crime, bribery, subsistence farming, barter, petty trade, and the stealing of state property. This is problematic for the design of public policy as these activities may raise very different (and conflicting) policy issues. This paper provides a framework with which to analyse these different types of 'hidden' activities in order to design appropriate social, labor market, fiscal, and other policies. We build on the concepts and definitions of the System of National Accounts (1993), to develop a new conceptual framework that distinguishes between four types of 'hidden' activities: informal activities, which are undertaken 'to meet basic needs'; underground activities, which are deliberately concealed from public authorities; illegal activities, which generate goods and services forbidden by the law; and household activities, which produce goods and services for own-consumption. We provide an example of how this concept of informal activities can be operationalised to analyze informal employment, and apply it to the Georgia Labor Force Survey (1999) data. Preliminary results reveal that more than half of Georgia's employed population works informally.
In the period of macroeconomic crisis in Georgia between 1991 and 1994 the combination of hyperinflation, catastrophic output drop and weak governance, have led to a sharp rise in inequality among households. Sharp inequities have arisen not only between households, but also between regions. This paper gives a picture of the main channels of redistribution and of the main driving forces of income inequality in Georgia, as it emerges from the analysis of the first representative survey of incomes and expenditures of Georgian households in 1996-1997. The paper finds that the level of inequality for money income in Georgia is comparable to highest inequality countries of Latin America (Gini equals 0.6). However, given the degree of informalization and demonetization of the economy, measuring only reported monetary incomes gives a somewhat misleading picture of the living standards. The paper argues that consumption is a much better indicator of welfare, especially in the Georgian context and explores the relationship between income and consumption in the Georgian context. Using consumption, we get the picture that is marked by very clear, though, not as striking inequalities (Gini coefficient of 0.36). Growth has not yet had a strong impact on consumption inequality per se, but we find evidence that during 1996-97 consumption increased at almost all levels of the distribution. During the same period, there was significant income mobility, except for those at the very bottom or the very top of the income distribution. For the latter, economic success appears to be closely associated with labor market status, ownership of productive assets and resulting earnings opportunities. Georgian economy is generating a system of much inequality. The key share of inequality can be attributed to informal incomes (using the decomposition analysis as proposed by Shorrocks). State transfers being reduced to minimum levels do exercise only a slight positive impact on the overall inequality outcomes.
The labor market is the main channel through which economic growth affects poverty. This paper is the first empirical account of main channels through which the growth in transition period has affected labor market and living standards in Georgia. It is based on both the official aggregate statistics and data from a representative household survey fielded in 1996-1997. The paper finds that in Georgia the labor market has shown outstanding flexibility during a period of severe political and economic turmoil in 1992-1995. Despite the catastrophic fall in GDP employment contracted only marginally. This flexibility has been achieved mainly through the informalization of employment, and through the reallocation of labor towards small-scale agriculture. Informalization has dampened the impact of the crisis and served to protect the poor, stabilizing the poverty rate at the politically and socially acceptable level (around 15% of the population). However, the informalization limited the impact of market forces favoring human capital accumulation on the formation of earnings. Today, a large and growing fraction of the Georgian labor force relies on self-employment as the primary means to earn an income. For some, this is an avenue for earnings mobility and growth; for the majority, however, self-employment remains constrained to low-productivity agricultural or trading activities, with little earnings stability and little potential for long term earnings growth. Prospects for the future hinge critically on the economy?s ability to generate new private formal employment, and to reallocate labor away from these low-productivity activities into higher value added sectors.