Issue 2, 2012. April-May



Negotiations for free trade agreements with the EU and eventually the United States continue. spoke with economists and Vakhtang Lezhava, one of the Prime Minister's chief advisors, about what impact potential agreements could have on foreign direct investment.

Ernest Petrosyan

The potential for a free trade agreement with the European Union could help bolster foreign direct investment (FDI), a critical source of income for the Georgian economy. While talks on the agreement continue, some economists believe trade incentives for the European market will entice investors to bet on Georgia.

FDI was up in 2011, rising to $980 million after a deep slide following the 2008 economic crisis. Investors put funds into the financial sector ($177 million), real estate ($122 million), energy ($158 million) and manufacturing ($180 million).

Most investment in Georgia's economy, however, has been so-called "passive" investment - investments that make little impact on the country's employment woes or GDP.

Vakhtang Lezhava, chief advisor on management and economic issues to Prime Minister, Nika Gilauri, predicts the free trade agreement could bolster investment - especially in agriculture and energy.

Economics analyst Shota Murgulia agrees that the energy sector is a strong contender for increased investment, while agriculture could also attract international companies looking to expand their market presence in the EU.

If investments materialize, Murgulia noted, the trade agreements could help resolve one of Georgia's most pressing issues: high unemployment.

But Paata Sheshelidze, the president of the New Economics School, argues that meeting the DCFTA preconditions set by the EU will be costly for Georgia, potentially increasing the costs of goods and services, which would make the country less attractive for investors.

"... it is indeed a good opportunity to access the European market... however, meeting the DCFTA preconditions will make Georgia approach EU economic realities, and the [Euro] zone itself is currently not so attractive for foreign investments," he stressed, adding that the agreement will likely fall short of universal free trade since the governments involved will set quotas and conditions on particular goods.

Lezhava however highlighted the benefits, namely becoming part of a large market hungry for new products.

"When we enter the EU free trade area we will become part of the EU internal market, which is one of the biggest markets in the world and all the benefits business people enjoy in it will also be extended to Georgian entrepreneurs... However, how these opportunities are used will depend on business people," he said.

Michael Fuenfzig, Assistant Professor of Economics at the International School of Economics at Tbilisi State University (ISET), agreed that the agreements could bolster investment.

He also pointed out that the impact could extend beyond just energy and agriculture, depending on how the economy develops and what the demand is. International experience with free trade, he noted, has shown that benefits sometimes come from unexpected quarters.

"For example, if you looked at South Korea in 1950s, no one would have predicted that South Korea would one day produce electronics products or other sophisticated technology," Fuenfzig said, adding, ". . . the same might happen to Georgia."