At the plenary session held on 21 February 2014, member of the Parliamentary Minority, Giorgi Vashadze, addressed the President of Georgia, Giorgi Margvelashvili, and stated: “It is indeed admirable that you studied the strategic document on economic development discussing the future of Georgia in 2020 but the fact that you liked it, rather, causes distress as the document contains copious amounts of lies. For instance, the document claims that in 2020 Georgia’s GDP per capita will equal USD 13,000. It’s simple math that the Georgian economy will need to grow by 12% this year, by another 12% next year and then keep up this growth rate in each of the following years in order to reach the given indicator by 2020. However, the budget presented by the Government projects a growth of only 5-6%.”
FactChecktook interest in the MP’s statement and verified its accuracy.
On 12 February 2014, the Ministry of Finance published the Socio-Economic Development Strategy of Georgia – Georgia 2020 report. The report presents the government’s view on the priorities of Georgia’s economic development and the ways of their implementation. The table below displays the economic indicators which the government is intending to improve in 2020.
The nominal measure of GDP per capita is presented in the document in the national currency (GEL) and not in USD as asserted by the MP. Therefore, in this part of the statement, Giorgi Vashadze made a crucial mistake which led to inaccurate results in his further calculations.
The government document was crafted in November of 2013 and so, consequently, the indicators of 2012 are considered as current while projected indicators refer to the plan for the year 2020.
In line with the data of GeoStat, the nominal GDP per capita amounted to GEL 5,818.1 in 2012 which confirms the figure named in the report. The document highlights that the real growth of the state economy is to amount to an average of 7% while the inflation rate is to equal 4.0% in order to ensure the accomplishment of the goals laid out in the Georgia 2020 project.
In the analysis of the report one circumstance should be given special consideration; namely, the fact that the indicator of the GDP per capita is presented in the nominal measure while the GDP growth rate is given in its real measure. The MP made a miscalculation in attempting to calculate the nominal GDP per capita of USD 13,000 by means of the real GDP growth rate of 7%. Meanwhile, the correct analysis of the subject requires us to firstly estimate the growth rate of the nominal GDP and based upon that make a judgement about the possibility of increasing the nominal GDP per capita to the point of GEL (and not USD) 13,000 by 2020.
Plugging in the given figures into the relevant formula (1+nominal GDP growth rate) = (1+real GDP growth rate)*(1+inflation) we established that according to the Georgia 2020 project, under the conditions of a 4% inflation rate, the nominal GDP growth rate is to equal approximately 11.28% in order to achieve the indicators projected for 2020.
GeoStat has yet to publish the nominal GDP growth rate of 2013 and so, therefore, we made independent calculations based upon the abovegiven formula to estimate the nominal GDP growth rate for 2013. The inflation rate stood at -0.5% in 2013 while the real GDP growth rate amounted to 3.2%. Consequently, the nominal GDP growth rate approximates 2.68%.
At the outset, it should mentioned that provided the size of the population remains constant, an x% growth rate of the nominal GDP entails an equal x% of growth in the GDP per capita indicator. For an illustration of this principle, let us take a country whose nominal GDP totals GEL 1,000 and the size of its population equals 20 persons. Accordingly, the GDP per capita amounts to GEL 50. In the case of a 10% growth in the nominal GDP and under the conditions the population size remaining unchanged, the volume of the GDP will equal GEL 1,100 while the nominal GDP per capita will amount to GEL 55 (=1,100:20). Increasing GEL 50 by 10% gives a result of precisely GEL 55.
The graph depicted below shows the figures that the nominal GDP per capita indicators are expected to reach under the conditions of the nominal growth rates described above.
In the case if in 2013 the inflation rate had equalled 3% instead of -0.5% and the real GDP growth rate had amounted to 7%, reaching the indicator of GEL 13,000 by 2020 would have been perfectly feasible. Therefore, under the conditions of a growth rate higher than 7% and/or with the inflation rate surpassing 4%, increasing the nominal GDP per capita to the extent of GEL 13,000 would be perfectly achievable.
However, we find it important to point out that the public should pay attention rather to the real than the nominal measure of the GDP per capita growth rate. In the given case, provided the size of the population persists unchanged, with the real GDP growth rate of 3.2% in 2013 and 7% in 2014-2020, by 2020 the real GDP per capita will reach GEL 5,355 (counted in prices of 2003). In that case, the real GDP per capita of 2020 will show a 1.66-fold increase relative to the indicator of 2012.
We would like to remind the reader that the real GDP reflects the value of goods and services produced in the country in constant prices (in our case, in the prices of 2003) in order to exclude the factor of price fluctuation which is a factor of inflation/deflation. In fact, the real GDP measure gives the picture of the actual number of the final goods produced in the country. Accordingly, the real GDP per capita shows what amount of those final goods is theoretically apportioned to each resident of the country.
Conclusion
In the Georgia 2020 report, the GDP of Georgia is expressed in GEL and not USD. Furthermore, the document forecasts the real GDP growth rate in the amount of 7% and not 5-6% as claimed by the MP. Additionally, Giorgi Vashadze fails to notice the fact that the GDP per capita is given in the nominal measure whereas the GDP growth rate is presented in the real measure. Therefore, in order to evaluate the feasibility of the expectation to increase the nominal GDP per capita to the point of GEL 13,000 by 2020, first and foremost we need to translate the given GDP growth rate from the real measure into the nominal and carry out the relevant calculations afterward.
Based upon the figures given in the Georgia 2020 report, under the conditions of a 7% real GDP growth rate and a 4% inflation, the nominal measure of the GDP per capita could indeed reach GEL 13,000 by 2020. Even though Giorgi Vashadze’s calculations were mathematically correct as he calculated the required growth rate for the nominal GDP (12%), he made a crucial mistake in interpreting the indicators discussed in the project and, therefore, reached wrongful conclusions.
Consequently, we conclude that Giorgi Vashadze’s statement: “The [Socio-Economic Development Strategy of Georgia – Georgia 2020] document contains copious amounts of lies. For instance, the document claims that in 2020 Georgia’s GDP per capita will equal USD 13,000. It’s simple math that the Georgian economy will need to grow by 12% this year, by another 12% next year and then keep up this growth rate in each of the following years in order to reach the given indicator by 2020. However, the budget presented by the Government projects a growth of only 5-6%,” is FALSE.
