of funds. Unfortunately, as the urgency of the short-term needs took primacy over long-term prospects, these action plans in their majority were not implemented effectively and few results materialized. In an attempt to break that cycle, UNDP and the World Bank supported the process of elaborating and drafting a poverty strategy paper that would establish a clear path for policy implementation By 2001, the first year of CCF II, despite years of attempted reforms, the country was facing a worsening economic and social situation and severe dysfunctions within state institutions. Development challenges were increasingly left unaddressed, as the political leadership’s attention became more and more focused on urgent short-term issues. 2.1.2 DEVELOPMENT CONTEXT AFTER THE ROSE REVOLUTION IN NOVEMBER 2003 The social tensions building from the deteriorating economic situation came to a head in November 2003. Following parliamentary elections widely perceived as rigged in favour of President Shevardnadze’s political bloc, the main democratic opposition united to demand the departure of the President and new polls. Massive popular demonstrations, first in Tbilisi and then in all major cities and towns, eventually led to the resignation of President Shevardnadze in the so-called Rose Revolution. The Speaker of Parliament assumed interim power and the Supreme Court annulled the parliamentary elections. In early January 2004, Mikheil Saakashvili won an overwhelming victory as the new President of Georgia and, in late March 2004, new parliamentary elections resulted in a large majority for the Saakashvili-supported National Movement - Democrats. The Rose Revolution represents a defining moment in the history of modern Georgia and its aftermath was a time of renewed hope. The incoming Government was largely made of a group of young and energetic western-educated reformers who quickly embarked on aggressive
structural and institutional reforms aiming at a radical transformation of the management of the economy. Sharing a common strong market-oriented economic philosophy, described by some Georgian and external observers as heavily influenced by libertarianism, these reformers moved rapidly to eliminate a very large number of rules and regulations they identified as sources of economic inefficiencies or corruption. They also proceeded swiftly to overhaul the tax and customs system to generate increased revenues while lowering the rates, and to privatize public utility services with a view to improving service. The clear priorities of the new administration were economic and financial stabilization and reforms for the resumption of economic growth. Success in these areas has been nothing short of remarkable. The simplification of many procedures provided incentives for large segments of the economy to abandon their informal status and have themselves formally registered, further encouraged by lowered tax rates and streamlined tax administration. As a result, tax-revenue collection increased from 15 percent of GDP in 2003 to over 25 percent in 2007. The reorganization of the public administration, through a reduction of the number of ministries and the amalgamation of many departments, cut by half the number of employees. This, in turn, allowed for a more streamlined functioning of the state apparatus and a significant increase in public sector wages, thus making these positions more attractive to Georgians with the appropriate training and skills. Other reforms focused on reducing business costs through either the streamlining of licensing requirements and regulations or their wholesale elimination. The latter was often justified on the ground that, since the State did not have the means to enforce them effectively, these regulations were useless anyway and could only provide opportunities for corruption. The regulatory reforms, reduction of corruption and improvement in the business climate, etc., have been recognized by a number of international
CHAPTER 2. DEVELOPMENT CHALLENGES AND NATIONAL STRATEGIES
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