Georgia has received a fair amount of publicity as a potential investment destination in recent years. The country won praise for its bold approach to reforms and economic policy. While it is true that Georgia made tremendous progress on issues like corruption, our examination of the structure of small and mid-sized enter-prises (SMEs) revealed that they face many serious problems that are not yet addressed by the government.
There are also a stunning number of self-employed persons, not observed by official statistics, many of whom could be described as “entrepreneur by default” as opposed to “entrepreneur by choice”. These measurement issues show that the notion of “entrepreneurship” should be considered carefully, especially in former Soviet economies like Georgia, and force observers to ask where entrepreneurship actually begins.
Entrepreneurship is as much a social phenomenon as an economic one and as such, the shape entrepreneurship takes in Georgia opens the door to a wide range of complex issues that transition economies have to tackle.
In 2010 The Economist concluded: “Today Georgia has reinvented itself as the star of the Caucasus. It is less cor-rupt than most former Soviet republics and one of the easiest places in the world to do business, according to the World Bank. Its liberalized economy has weathered Russian embargoes, and the state held together during the war with Russia. Its police do not take bribes and electricity is no longer a luxury. Most important, peo-ple are no longer surprised by such success. The biggest transformation is in their minds.” While one has to acknowledge that Georgian authorities took bold steps to fight corruption and gave economic policies a clear neo-liberal direction, it is nonetheless crucial to take a critical approach to the claims that Georgia has made about its success in facilitating entrepreneurial endeavors. The methodology used by the World Bank for its “ease of doing business indicators” (EDBI) is highly controversial and Georgia’s rise on the ranking took place against the background of important political concerns.
To see beyond the facade, one has to look closer at the structure of the private sector. From the regulatory, and in consequence statistical, perspective, Georgia’s economy consists of two different components: The “observed” economy is described by statistics and regulated by informed bureaucrats, while the “unobserved” economy functions beyond the bounds of any regulations (such as requirements to register, observe the labor code, pay taxes, or report performance statistics) and therefore falls outside of national statistical instruments.
In terms of occupational statistics, the persons active in the unobserved part of Georgia’s economy are defined as “self-employed.” Little is known about the mode of activity of the self-employed except that they live mainly in rural areas and that some may de facto run micro-enterprises. The worforce amounts to 1.9 million people, but only 20 percent is hired by the private sector and 12 percent by the public sector. With 16 percent of the workforce being unemployed, that leaves about half the total workforce as self-employed. Barely anything can be found about this portion of the Georgian economy in statistics. Yet self-employment amounts to about two-thirds of the total employment and, according to our estimates, generates about 18 percent of GDP.
These sharp employment differences within the population underline the sometimes overlooked side of entrepreneurship: “entrepreneurship for survival”. This form of entrepreneurship is a poverty-related and social policy issue. On one hand, it can be considered as massive unemployment, which harms the economic base of the country and is the reason Fitch Ratings estimated that Georgia has a middle level of income and a narrow economic base (EPRC, 2009:8). Indeed the staggering figure of 1.9 million self-employed individuals explains the narrow base of the Georgian economy and its low level of labor productivity. Moreover, more than 800,000 of the so called self-employed (81 percent) live in rural areas.
Thus, Georgia’s case illustrates very well the two-sided coin characteristic of “entrepreneurship”. In other words, on one side, the unemployment point of view is linked to social policy. The average monthly income for Georgia is US$175 and about 41 percent of households were poor in 2009, if the minimum subsistence level is used as the poverty line (Gugushvili, 2011).
On the other side, half of the economy relies on “entrepreneurs”, and that is an economic policy concern. Moreover this combined perspective on the GDP structure allows us to deduce that self-employment generates about 18 percent of the GDP. Interestingly, we find the two sided coin problem at the heart of the definition of a self-employed person given by Geostat: It can either be equated with “entrepreneurship” or survival.