Issue 6, 2012. December-January

   

CAN GEORGIA BECOME A "CAUCASIAN PANTHER"?

What is the way forward for Georgia? Ask this question to any government or business professional and you'll get a wide range of answers. Look at recent newspaper articles and you get the impression that the country's potential can be found in sectors as diverse as agriculture, biotechnology, ICT, banking and light manufacturing. Look at the facts, and your confusion is complete.

Martijn Kanters

According to Geostat, last year's GDP growth was 7 percent, and, with 6.8 percent in the first quarter and 8.2 percent in the second, 2012 GDP growth could reach around 7.5 percent. So it seems we're on the right track - but are we? A closer look at the Georgian economy reveals a different picture. One of the main concerns is that the country is suffering from a chronically negative - and worsening- trade balance. In 2011, total exports amounted to a mere $2.2 billion, just over 15 percent of GDP and down from over 30 percent in 2003. In context, the EU27 average was 44 percent in 2011 and over 70 percent in the New Member States, up from 53 percent in 2003, a year before accession. Economic integration in the European Union has clearly had a major positive impact on the exports of CEE countries. The openness of the economies of small countries such as the Baltic states, Slovenia and Slovakia is even more pronounced with almost 80 percent of exports to GDP on average; Georgia has a wide gap to bridge.

Actually, Georgia has become an increasingly closed economy. Although the trend is slowly being reversed (in 2009, exports accounted for just over 10 percent of GDP), there is a long way to go to boost the country's export value, because relying mainly on domestic consumption will not be a sustainable strategy for continued economic growth. With its small domestic market, (re-) connecting to export markets will be the key to the future of Georgia. Assuming trade negotiations and economic integration efforts will be successful, the question then remains: what can be exported?

Browsing through the many trade publications, business magazines and newspaper articles, it is surprising to see how few references are made to competitive advantage. In an economy as small as Georgia, internationally competitive sectors can only number a few. In comparison, the Georgian economy is half the size of Latvia, a country with just 2 million inhabitants. The new EU Member State closest to Georgia in terms of population size - Slovakia (5.4 million inhabitants) - has a total GDP almost 7 times higher than that of Georgia. And even these larger economies have become more and more specialized and heavily export-oriented, along the path followed by the Asian "Tigers" in the 1990s.


In the case of Slovakia, two sectors- the automotive and electro-technical industries- have attracted significant volumes of FDI and now account for more than half of the country's exports and over 40 percent of GDP. Slovakia's competitive strengths are therefore concentrated in just two economic sectors, in which it has revealed international competitive advantage.

It is clear that Georgia will need to discover specific economic niches in the way many small countries across the CEE have done. First, an in-depth competitiveness assessment would need to be conducted to identify those target sectors in which Georgia has emerging or latent potential. My feeling is that there won't be more than three, and they'll be highly specific. Definitely not ten broad sectors, as the National Investment Agency believes. Second, the package of investment incentives will need to be evaluated and adapted to the specific circumstances and needs of prospective investors, both local and foreign. I also believe that Georgia provides fertile ground for the wide application of public-private partnerships, and specific arrangements can be made that would attract additional investment and pave the way for funding approaches that are now starting to become mainstream in Europe.

As our recent research on the Georgian real estate market has revealed, current development opportunities remain relatively limited due to subdued demand, determined by its economic fundamentals. As real estate is an accommodator of socio-economic development, a common economic development strategy would need to be defined first, accompanied by new funding approaches. Public-private partnerships can play a role in this process, as well as allow for the more efficient use of state budgets.

Celebration of Georgia's truly unique history, the spirit of its people, and the wealth of opportunities offered by participation in the global economy, form the backbone of its future. The combination of finding specific economic niches and mobilizing innovative funding approaches could turn Georgia into a true, albeit small, "Caucasian Panther."

Martijn Kanters is a consultant at IPM Georgia. He was based for more than 10 years in Prague and has worked across the CEE on issues of economic development and real estate. He can be reached on mkanters@ipm.ge.