The Case of The Southern Caucasus

Environment and Security / 13

Southern Caucasus

Economic output in the Southern Caucasus, 1990-2003 Gross National Income (GNI) per capita in current US dollars

External debt in the Southern Caucasus, 1993-2002

In percentage of the Gross National Income (GNI)

100

1 000

900

90

800

80

Georgia

700

70

600

60

Azerbaijan

Georgia

50

500

Armenia

40

400

Armenia

30

300

25

200

20

Azerbaijan

10

100

1990 (Estimates)

0

0

1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

1995 1994 1993

1996 1997 1998 1999 2000 2001 2002

Source: International Monetary Fund (IMF); Online database, The World Bank, Washington DC.

Source: Economist Intelligence Unit (EIU), London.

In spite of economic recovery in recent years, living stan- dards and national economic productivity remain below those of the Soviet era. Since 2002, Armenia and Azerbaijan have achieved annual Gross National Income (GNI) growth rates of 11 and 10.6 percent respectively. Georgia’s GNI grewby 8 percent in 2003, fuelled by the development of the Baku-Tbilisi-Ceyhan (BTC) pipeline and related ventures. Government programmes for poverty reduction and eco- nomic development are planned for all three countries to consolidate these recent economic achievements, though implementation is limited. As a result, only a small por- tion of the population is profiting from the new economic development, while social inequalities continue to rise. Economic development has been concentrated in the capital cities, while other urban centres and provincial regions remain underdeveloped. As low-income countries with small populations, some countries of the Southern Caucasus offer a limited mar- ket for international investment. Economic development programmes demonstrate the will of the governments

to improve the business environment, particularly for small and medium enterprises (SME). In practice, how- ever, entrepreneurship is discouraged by poor access to affordable start-up capital, by lack of access to or distorted information on markets and regulations, and by weak legal systems. This pushes many SMEs into the informal sector, resulting in lost tax revenue and job creation opportunities. One of the major challenges undermining government control, socio-economic and democratic development across the Southern Caucasus is corruption. On the one hand, corruption is a symptom of the limitations of state institutions. On the other, corruption hampers economic, political and institutional development. Transboundary crime, trafficking in drugs, arms and people, and the black market economy, are all linked to corruption and weak legal systems. Together, they contribute to the loss of tax revenue for public investment and law enforcement, while undermining enforcement capacity, which together allow illegal and corrupt habits to continue.