Transcript Growing Apart? A Tale of Two Republics: Estonia and Georgia

Thorvaldur Gylfason
Eduard Hochreiter
 Since collapse of Soviet Union in 1991
 Three Baltic states, now EU members, have
significantly better than other FSU states
fared
 Aim
is to apply standard growth economics to a
comparison of Estonia and Georgia

Extensive vs. intensive growth
 Similarities
 Small, poorly endowed with natural resources
 Prosperous in past golden age
 Annexed by Russia in 1721 (Estonia), 1801 (Georgia)
 Independent 1918-40 (Estonia), 1918-21 (Georgia)
 Difference
 Estonia embarked on ambitious reforms
 Georgia did not, was torn by civil war
 Estonia’s
per
capita GDP sank
from rough parity
with Finland in
1940 to a third of
Finland’s in 1991 …
 … then rose to half
of Finland’s per
capita GDP in 2005
Estonia
Latvia
Lithuania
Russian Federation
Belarus
Kazakstan
Ukraine
Azerbaijan
Turkmenistan
Armenia
Georgia
Moldova
Uzbekistan
Kyrgiz Republic
Tajikistan
2006
1991
0
5000 10000 15000 20000
 Georgia’s
per
capita GDP fell
from almost half
of Estonia’s in
1991 to one-fifth
in 2005 …
 … and also
declined relative
to Russia, from
38% to 32%
Estonia
Latvia
Lithuania
Russian Federation
Belarus
Kazakstan
Ukraine
Azerbaijan
Turkmenistan
Armenia
Georgia
Moldova
Uzbekistan
Kyrgiz Republic
Tajikistan
2006
1991
0
5000 10000 15000 20000
took a
deeper and longer
lasting plunge: its
per capita GDP
contracted by
almost 80% 1988-94
 Estonia’s per capita
GDP contracted by
33% 1989-93
16000
14000
Estonia
Georgia
12000
10000
8000
6000
4000
2000
0
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
 Georgia
story on
logarithmic scale
 Puzzle: with such
a low level of
initial income, why
did Georgia not
grow more rapidly
than Estonia
thereafter?
 Sources of growth
100000
Estonia
Georgia
10000
1000
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
 Same
 Per
capita output
depends on

Efficiency, A


Human capital per
person, H/L


Education
Capital/labor ratio,
K/L


Trade
Investment
Natural capital per
person, N/L

We assume c = 0
 Real

capital
Investment in
machinery and
equipment
 Human

capital
Education, on-thejob training, and
health care
 Foreign

Growth
capital
Trade and
investment
Investment
Education
Trade
 Estonia
invested
29% of GDP in
machinery and
equipment on
average 1989-2005
compared with
20% in Georgia
40
35
30
25
20
Estonia
15
Georgia
10
5
0
100
90
80
70
60
50
40
Estonia
Georgia
30
20
10
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
Nearly all Estonian
youngsters attend
secondary schools
compared with 80% of
Georgians
 Nearly two thirds of
young Estonians go to
college compared
with 42% in Georgia
 Expenditure on
education amounts to
about 6% of GDP in
Estonia compared
with 2% in Georgia

Estonia, 483
personal
computers per
1,000 inhabitants
compared with
42 in Georgia
 In Estonia, 513
internet users per
1,000 inhabitants,
39 in Georgia
100
90
80
70
60
50
40
Estonia
Georgia
30
20
10
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
 In
expectancy at
birth took a deep
dive in Estonia
before 1990, did
not recover until a
decade later, and
then sailed past
that of Georgia in
the late 1990s
74
72
70
68
66
64
Estonia
62
Georgia
60
58
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
 Life
2001, Estonia had
6.7 hospital beds
per 1,000
inhabitants
compared with 4.3
in Georgia
 All child births in
Estonia are
attended by skilled
medical staff
compared with 92%
in Georgia
74
72
70
68
66
64
Estonia
62
Georgia
60
58
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
 In
of both
countries
continues to
decline …
 … but that is also
true of most of the
rest of Europe and
the OECD region
3.5
3
2.5
2
1.5
Estonia
1
Georgia
0.5
0
1960
1963
1966
1969
1972
1975
1978
1981
1984
1987
1990
1993
1996
1999
2002
2005
 Population
25
Estonia
20
Georgia
15
10
5
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
1993
inflows of FDI
in Estonia: 7% of
GDP 1992-2005 on
average compared
with 4% in Georgia
 With more domestic
and foreign
investment and
more students at
school, small
wonder that Estonia
grew faster than
Georgia
1992
 Net
from
Estonia equaled
73% of GDP on
average 1992-2005
compared with
33% in Georgia
 Export figures
include re-exports
100
90
80
70
Estonia
Georgia
60
50
40
30
20
10
0
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
 Exports
has
abolished all tariffs,
while Georgia
continues to depend
on import
restrictions for
about 10% of its tax
revenues
 It takes 1.7 days for
importers in Estonia
to clear customs
compared with 3.4
days in Georgia
18
16
Estonia
14
Georgia
12
10
8
6
4
2
0
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
 Estonia
 Financial

capital
Liquidity greases
the wheels of
production and
exchange
Growth
 Social
capital adds
to cohesion
Honesty
 Democracy
 Equality

Liquidity
Honesty
Democracy
Equality
 Georgia
initially
had higher
inflation than
Estonia, but
managed after
2000 to bring it
down to singledigit figures
 In Georgia, severe
initial monetary
overhang
180
160
140
120
100
80
60
40
20
0
Estonia
Georgia
50
45
Estonia
40
Georgia
35
30
25
20
15
10
5
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
1993
surprising that
process of
monetization of
economic
transactions was
slower in Georgia
than in Estonia
1992
 Not
50
45
Estonia
40
Georgia
35
30
25
20
15
10
5
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
1993
2005, interest
spread was 3% in
Estonia compared
with 14% in
Georgia, suggesting
continued
inefficiency and
lack of competition
in Georgian
banking system, or
high credit risks
1992
 In
50
45
Estonia
40
Georgia
35
30
25
20
15
10
5
2005
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
0
1993
progress also
in Georgia where
interest spread
used to be 20%-24%
 Almost all bank
assets are now
foreign-owned in
Estonia compared
with two thirds in
Georgia
1992
 Yet,
 Agriculture’s
share
of GDP in Estonia
has decreased to
4% compared with
18% in Georgia
 Reflects Estonia’s
stronger emphasis
on economic
modernization
70
60
Estonia
50
Georgia
40
30
20
10
0
 In
2005, electrical
power was
interrupted for
one day in Estonia
compared with 39
days in Georgia
 In 2007, it took 7
days to start a
business in Estonia
against 11 days in
Georgia
45
40
35
Estonia
Georgia
30
25
20
15
10
5
0
 Manufacturing
19952005 accounted for
almost 75% of
Estonia’s exports
compared with 33%
in Georgia
 World Bank’s Ease of
Doing Business Index
now puts Estonia in
17th place and
Georgia in 18th, up
from 112th place in
2003
90
80
70
60
50
40
30
Estonia
20
10
0
Georgia
 In
2005, tax rates
were cited as a
major business
constraint by 3% of
managers surveyed
in Estonia
compared with 36%
of managers in
Georgia
90
80
70
60
50
40
30
Estonia
20
10
0
Georgia
90
80
70
60
50
40
Estonia
30
Georgia
20
10
2008
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
1997
0
1996
countries
have liberalized on
many fronts at
once according to
the Economic
Freedom Index
 Source: Heritage
Foundation
1995
 Both
4
3
Estonia
2
Georgia
1
2004
2003
2002
2001
2000
1999
1998
1997
0
1996
2004, Estonia
scored 1-2 points
higher than Georgia
5
1995
 Until
6
1994
Infrastructural glue
that holds society
together and keeps it
working smoothly and
harmoniously
7
1993

8
1992
as
investment in social
capital
1991
 Democratization
8
7
6
5
4
3
Estonia
2
Georgia
1
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0
1992
Estonia, 2% of
managers surveyed
described their
lack of confidence
in the courts as a
major business
constraint
compared with
12% in Georgia
1991
 In
8
7
6
5
4
3
Estonia
2
Georgia
1
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
1994
1993
0
1992
Estonia, 2% of
the managers
surveyed described
crime as a major
business constraint
compared with
24% in Georgia
1991
 In
 On
a scale from 1 to
10, there is a
persistent 3 to 4
point difference
between corruption
perceptions indices
in Estonia and
Georgia
 Source:
Transparency
International
7
6
5
4
Estonia
Georgia
3
2
1
0
1998 1999 2000 2001 2002 2003 2004 2005 2006
 In
Georgia, 20% of
managers surveyed
described graft as a
major constraint on
their business
operations against
4% in Estonia
 In 2003, Gini index
of income inequality
was 36 in Estonia
and 40 in Georgia
7
6
5
4
Estonia
Georgia
3
2
1
0
1998 1999 2000 2001 2002 2003 2004 2005 2006
Suppose a = b = 1/3, c = 0
Assume v = 0.1
u = years of schooling
By definition; K/Y is
proportional to I/Y
Assume v, g, and d
are the same in Estonia
and Georgia
 Decomposition
of 2005 per capita income
differential of 4.73
 Investment rates are 0.29 and 0.20

Would by itself account for a 20% difference in per
capita incomes
 Years

of schooling are 14.5 and 13.1
Would by itself account for a 100% difference in per
capita incomes
 Leaves
a 95% difference to be explained by
differences in efficiency, including governance
 Intensive growth counts, not extensive growth
 Estonia
invested more relative to GDP than
Georgia, and also attracted more FDI
 Estonia sends more young people to
secondary schools as well as to colleges and
universities than Georgia
 Estonia has done more than Georgia to
increase economic efficiency



Liberalize trade
Stabilize prices, stem corruption
Privatize its banks and other state enterprises
 Estonia
has moved farther and faster in a
growth-friendly direction