Socio-economic system of Abkhazia and problems of its development, by Inal Ardzinba

International Alert | Georgia-Abkhazia on the road to 2020

Inal Ardzinba
President of World Economy Association, National Research University - Higher School of Economics, Moscow

In the early 1990s, Abkhazia faced the problem of a “triple transition”: firstly, from a Soviet (authoritarian) state to a democratic state; secondly, from a command economy to a market economy; and thirdly, from a republic incorporated within another state to an autonomous state. Adjusting to this combination of three transformation processes across a number of different areas incurred significant costs. The problem of “triple transition” was further compounded by a disastrous war.

This was followed by a decade of economic growth in the 2000s, a period in which Abkhazia was transformed. Some economic and social problems inherited from the “lost” decade of the 1990s were overcome – or at least the preconditions for overcoming them put in place.

Mistakes were of course made – some dangerous and significant. However, it is all too easy with hindsight to talk about what should have been done differently 10 years ago; a perfect socio-economic policy only exists in the realms of utopia. We now need to build on the experience of our past mistakes.

The Abkhaz transition economy would appear to be facing quite different challenges from those faced by many other countries undergoing transition (both in the former USSR and in Central and Eastern Europe) that want to simply establish “sustainable” development. Abkhazia wants to achieve a socio-economic leap forward, and there is a sound objective basis for this: the conditions are favourable for development, both domestically (the republic’s significant economic potential) and externally (the relatively stable regional situation in the Caucasus).  

Abkhazia thus has for the first time in a relatively long period a chance to take a leap forward and a real opportunity to make the transition from the anti-crisis mode and short-term tactical objectives to the formation of long-term strategic development milestones.

Abkhazia’s contemporary macro-economic position

Figures for 2010 from the Abkhaz State Statistical Agency clearly show approximately 30% growth in nominal gross domestic product (GDP) compared to 2009.[1] This is a very high figure, which confirms Abkhazia’s economic potential, though is attributable to a large influx of Russian money post recognition. However, we also need to bear in mind that this is growth in nominal and not real GDP. After price increases have been taken into account, the real economic growth is more modest (under 15%).

Interestingly, Abkhazia’s GDP in 2010 (latest data) was around RUB 20.8 billion (about US$682 million), with a World Bank global rating of 181. Per capita GDP in 2010 was around RUB 86,000 (almost US$3,000), putting it in 114th place, ahead of Georgia in 117th place. Of course, according to these indicators, Abkhazia is still below the hundredth place globally, but it is worth recalling that in terms of economic development it cannot be classified as a “least developed country” (the UN classifies 49 countries of the world as “least developed”). In terms of economic development, Abkhazia is broadly similar to small Pacific Ocean island states (the Federal States of Micronesia, the Marshall Islands) and the Caribbean (Grenada, Saint Vincent and the Grenadines), but has nothing in common with underdeveloped countries in Africa or some “failed states”.

Any examination of a country’s economy should not be limited to an analysis of absolute economic indicators such as GDP or per capita GDP. The living standards and quality of life of ordinary citizens are determined above all by an economy’s institutional profile. This includes institutional factors which every citizen comes across on a daily basis: the level of corruption, the number and quality of administrative barriers, the degree of market monopolisation and concentration of capital, the legal system, the judiciary and much else. These indicators are much more significant for the real economy than so-called absolute indicators.

Unfortunately, institutions are underdeveloped in Abkhazia. Despite 20 years as a capitalist country, it has not managed to develop modern market institutions. The gap between institutional and absolute indicators in Abkhazia may well be among the highest in the world.

Take, for example, the following argument: in Abkhazia, informal institutions have a huge impact on the economy, such as verbal “rules of the game” that are not formally recorded and specific economic traditions. Most unfortunately, the overwhelming majority of these institutions have a negative impact on the economic development of the republic.

For instance, it is often unclear who owns what in Abkhazia. Frequently, the “title” (a special term usually used to refer to a person or persons’ property rights) to a property is based on a person’s word and the “law of the strong”; it is not based on a formalised and specified right to own, dispose of or use the property. In most cases, this creates legal uncertainty, since over time conflicts arise between “titleholders” due to the absence of formal property rights. These conflicts are generally resolved extra-judicially.

People can judge for themselves how disruptive the impact of informal institutions might be on the economy.

Obstacles to socio-economic development and measures to address them

The development of any market system is determined by certain inherent characteristics. Socio-economic imbalances are inevitable and Abkhazia is no exception. Problems of socio-economic development of different types and severity have a negative impact on living standards and the quality of life of ordinary citizens of Abkhazia. The principal ones are: institutional underdevelopment; demographic imbalances; an unattractive investment climate; a poor legal culture; low levels of research and innovation; the insignificant role of the human factor in the economy; an underdeveloped financial system; a divergence in incomes across society; geographical disparities in economic development; significant market concentration; and negligible domestic demand. Of course, this list is not exhaustive.

In order to successfully resolve these problems, an effective structural policy is required based on a socio-economic development strategy. Indeed, a modern state cannot develop out of a vacuum. The time for ad hoc economic solutions is over.

In the modern world, the overwhelming majority of countries have strategies or plans for socio-economic development drawn up, signed and implemented at the highest levels of government. However, most of them share the same faults: these strategies (plans) do not envisage a forecast period, do not identify specific problems of socio-economic development (and thus tend to “tilt at windmills”), and do not specify targets for resolving these problems or the mechanism to achieve these targets. Many of them are reminiscent of superficial textbooks on the global economy, replete with trivial arguments such as: ‘Globalisation is the principal trend in the global economy and it is essential to adapt to it.’

The Socio-Economic Development Plan of the Republic of Abkhazia[2], approved by the president under Decree No. 248 (23rd December 2005), is characterised by all these faults – although the plan also contains many perfectly good ideas.

Drawing up an effective and realistic strategy is therefore crucial. However, even once it has been drawn up, there is traditionally a risk that it will remain on paper only. Therefore, it is important to identify what conditions are needed for long-term reforms to be implemented. The global history of the reform of socio-economic systems shows clearly that the strategies with the best chances of being implemented are those that take into account “broad public coalitions”.

Individual coalitions tend to act in their own interests (to use the language of micro-economic analysis, ‘they maximise their own usefulness’). In this sense, it is logical to suppose that implementing comprehensive transformation of strategy could damage individual groups or confer a relatively smaller benefit on them compared with alternative development scenarios. However, Abkhazia is currently at a historic crossroads. If we take the wrong path, this will lead to costs for the overwhelming majority of coalitions and the state as a whole.

In addition, the implementation of the strategy will be held up by the inertia of public opinion. Any comprehensive reforms involve not only implementing a certain set of projects, but also a change of mindset – a significant transformation of society’s expectations and behaviour. At the same time, in contemporary Abkhaz society a demand for “rapid results” has formed. Consequently, there is a demand for instant proof that the policy chosen is the right one and stands a good chance of success. However, long-term strategies involve the implementation of institutional transformation, the results of which cannot be seen overnight.

Forecasts of the socio-economic development of Abkhazia up to 2020

The following methodology has been used to structure this part of the study: three principal scenarios and two sub-scenarios (for scenario 1) are identified, along with endogenous and exogenous parameters for each scenario. The most likely scenario for Abkhazia’s socio-economic development is then identified.

The three scenarios of socio-economic development up to 2020 are as follows:

• Scenario 1: “The Abkhaz economic miracle”
• Scenario 1.1: “A miracle with a human face”
• Scenario 1.2: “A miracle with an inhuman face”
• Scenario 2: “Default”
• Scenario 3: “Terra incognita”[3]

In my view, these are the main historic options facing Abkhazia today. I shall summarise them in detail one by one:

Scenario 1: “The Abkhaz economic miracle”

The endogenous parameters for this scenario are as follows: highly balanced development of the national socio-economic system, along with a significant reduction in the cumulative severity of socio-economic development problems; a highly effective resolution of the fundamental problems of socio-economic development; a minimum average annual increase in real GDP of 8%; making high-quality adjustments to the “socio-economic development plan” and putting in place a highly effective mechanism for achieving the targets set out in the plan.  

The exogenous parameters in this instance are: a very favourable global political and economic framework; the highly balanced development of political and economic relations between Abkhazia and its principal partner countries; and sustainable development of the Russian Federation’s economy.

Scenario 1.1: “A miracle with a human face” (Assuming that the endogenous and exogenous parameters for Scenario 1 are met)
The endogenous parameters for this sub-scenario are as follows: economic growth is completely controlled by the relevant state bodies; knowledge-based sectors provide economic growth of over 30 percentage points; man-made damage to the environment is kept to a minimum; the human factor becomes a key determinant of the economy; and human beings are the quintessence of socio-economic development.

The exogenous parameters are as follows: cooperation on innovation and research and development (R&D) is developed between Abkhazia and partner countries.

Scenario 1.2: “A miracle with an inhuman face” (Assuming that the endogenous and exogenous parameters for Scenario 1 are met)
The endogenous parameters in this case are as follows: economic growth is partly controlled by the relevant state bodies; knowledge-based sectors provide economic growth of less than 30 percentage points; and there is perceptible man-made damage to the environment. In this sub-scenario, the human factor does not become a key determinant of the economy. Moreover, socio-economic growth is mainly provided by the state.

The exogenous parameters are: low-level cooperation on innovation and R&D between Abkhazia and partner countries.

Scenario 2: “Default development”

The endogenous parameters for this scenario are: moderately balanced development of the national socio-economic system, along with a moderate reduction in the cumulative severity of socio-economic development problems; a moderately effective resolution of the fundamental problems of socio-economic development; an average annual increase in real GDP of 4% to 7%; making medium-quality adjustments to the “socio-economic development plan” and putting in place a moderately effective mechanism for achieving the targets set out in the plan.

The exogenous parameters are: a moderately favourable global political and economic framework; moderately balanced development of political and economic relations between Abkhazia and its principal partner countries; and moderately sustainable development of the Russian Federation’s economy.

Scenario 3: “Terra incognita”

The endogenous parameters for this scenario are as follows: poorly balanced development of the national socio-economic system (or stagnation); a slight reduction in the cumulative severity of socio-economic development problems; a slightly effective resolution of the fundamental problems of socio-economic development; an average annual increase in real GDP of less than 4%; making low-quality adjustments to the “socio-economic development plan” and putting in place a relatively ineffective mechanism for achieving the targets set out in the plan.

The exogenous parameters are: an unfavourable global political and economic framework; poorly balanced development of political and economic relations between Abkhazia and its principal partner countries; and unsustainable development of the Russian Federation’s economy.

The most likely scenario for the socio-economic development of Abkhazia is Scenario 1.2 – “A miracle with an inhuman face”. This scenario assumes active socio-economic development, but with elements of unmanageability: this, together with the accumulation of economic imbalances it generates, could lead to the economy overheating and a serious economic crisis (possibly by 2017).

The justification for this scenario can be found in the current trends of socio-economic development in Abkhazia. In fact, there are reasons to assume that the socio-economic system will develop dynamically and in a more or less balanced manner. However, the cumulative severity of the problems of socio-economic development is likely to tend to decrease. At the same time, the main trends in the contemporary socio-economic development of Abkhazia suggest that high rates of growth in real GDP are possible in the near future.

Until 2020, the favourable global political and economic framework is likely to remain in place. It is likely that the so-called “second wave” of the crisis (when it comes) will not be as destructive as the first.

Having said that, it would be naive to hope for the complete absence of conceptual problems in relation to Abkhazia’s development. All indications suggest that economic growth will be poorly controlled by the relevant state bodies. At the same time, knowledge-based sectors will provide considerably less than 30 percentage points of economic growth. In fact, it is fairly unlikely that human beings and their intellect will be at the centre of Abkhaz development, at least until there are perceptible systemic governmental decisions which might form the basis for human potential to play a leading role in socio-economic development.

Of course, the reader may feel that these reflections are too contingent, and it is fair to say that such forecasts, like most long-range calculations, potentially have a very wide margin of error.

However, for successful development and to resolve the most acute problems and imbalances, we must attempt to understand what political and economic interrelations await the country in the near future. These attempts will inform strategic thinking and the ability to implement not just tactical, but also strategic manoeuvres.

Abkhazia’s foreign economic strategy

The 2009 Annual Report of the National Bank of Abkhazia[4] included a highly important strategic document characterising the country’s foreign economic position – its balance of payments. The mere fact that this document appeared is a signal event, although it should be prepared annually to allow the trends in foreign economic processes to be tracked.

The overall balance of payments for 2009 can be used to identify the main trends in Abkhazia’s foreign economic position. Without going into a detailed analysis, the main arguments that should be advanced in this context are noted below.

Abkhazia is a net importer of commodities. The trend towards a deficit in external trade in commodities appears to be persistent (the trend continues since 2000) and is increasing steadily (from 2000 to 2009, the deficit increased by 4793%). This is certainly negative for the Abkhaz economy. Firstly, the country is becoming dependent on external supplies. Secondly, it is wasting money on paying for imported products which, given the lack of national currency, could be highly destructive.

The structure of the country’s export of commodities is highly unfavourable. Abkhazia exports mainly citrus fruits, hazelnuts and fish. It imports manufactured goods, gasoline and tobacco products.

At the same time, the balance of payments clearly shows that Abkhazia is a net exporter of services. Export volumes consistently exceed import volumes. This is mainly due to tourism services (an export-type operation), state and private transfer payments, and investments which are highly favourable for the development of the economy in terms of cash supply.

Overall, the balance of payments is positive, meaning that more funds are imported than are exported. This is a source of funds for the national economy which must be incentivised, mainly through export-oriented economic growth.

In my view, an economy as small as Abkhazia (compared with the Russian Federation, for example) cannot develop unless it is actively integrated into the international economic system – specifically, through modest domestic demand and consequently a modest domestic market. Consequently, Abkhazia must participate fully in the global economy, its geo-economic strategy focused on becoming part of global value chains. To do this, it needs to end its reliance on exporting end systems in the future.

Abkhazia must also strengthen economic relations with its long-standing partners, particularly Russia. Regarding the latter, it needs to find a civilised and mutually advantageous formula for economic cooperation between the two countries. If this can be done, Moscow and Sukhum will be able to play a bigger game, which will bring both countries significant dividends in terms of the economy and international politics. If they manage it, the Moscow-Sukhum axis could become an engine of economic growth for the whole Caucasus region.

Discussion questions

• In relation to the need to develop a long-term socio-economic development concept for Abkhazia (and the possibility of implementing a strategy based on it): is it possible to apply the Russian experience of broad public expertise ?

• In relation to the degree of integration of Abkhazia into the world economy: how do international financial and economic imbalances affect the status of the national economy of the young Abkhaz republic?

• In relation to developing reliable state statistical service: to what extent we can rely on the work of the National Statistical Office in decision-making at the level of state policy?

• In relation to institutional peculiarities and problems of development: Abkhazia - a country of informal institutions?

• In relation to external trade strategy: how can Abkhazia successfully engage in the world economy? In which goods and services to invest?

• In relation to the economy of Abkhazia in 2020: will we be able to strengthen the role of the human factor in the economy?

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[1] Abkhazia v tsifrakh za 2010. [Abkhazia in figures for 2010]. The Abkhaz State Department of Statistics, Sukhum 2011.

[2] The Socio-Economic Development Plan of the Republic of Abkhazia. 12th August 2006. Available in Russian at http://www.abkhaziagov.org/ru/president/activities/programms/detail.php?ID=1398

[3] Latin for “unknown territory”.

[4] National Bank of the Republic of Abkhazia, Annual Report of the National Bank of the Republic of Abkhazia for 2009 (Bank of Abkhazia), 22nd March 2010. Available at: http://www.nb-ra.org/ru/pdfdoc/ReportBA/2010/01.01.2010.pdf.

Source: International Alert