Issue 4, 2014. August-September


VATO LEJAVA: MAXIMIZING THE GAIN, MINIMIZING THE PAIN OF THE EU-DEAL spoke with Vato Lejava, the chancellor of the Free University of Tbilisi and formally a chief economic advisor for former Prime Minister Nika Gilauri, about Georgia's new EU Association Agreement and its potential impact on the economy.

More investment, more jobs, more trade, more contact with Europe - the Association Agreement with the European Union is casting high expectations for a better, stronger Georgian economy.

But along with the optimism, there has been a slow but steady murmur about high costs, heavy regulation and hurdles for Georgian businesses and the Georgian government to turn the potential of the EU deal into a reality at home.

One of the biggest concerns has been over the cost of implementing EU-standard legislation, especially in Georgia's struggling agriculture sector. There have also been worries about Georgia's fledgling institutions being up for the mammoth task of administrating the new rules and regulations that the country will be responsible for passing under the agreement.

The key, said Vato Lejava, a former chief economic advisor for the Georgian government under ex-Prime Minister Nika Gilauri, is to "off-set" any potential pain for the economy with legislation that comprehends the gap between EU standards and Georgian reality.

Using "guaranteed pain" to achieve great gains

"I would describe this agreement like a guaranteed pain with no guaranteed gain. And the whole science of implementing this agreement is to off-set the guaranteed pain by available or feasible gain," he said.

"We need to adjust to the EU regulations, which are, to put it in a nutshell, the luxury of a richer community. It is like a car. Of course everyone understands that Mercedes is a good car - quality and safety and so on. But you have to pay for it."

That cost will come in various forms and hit different areas of the economy in a variety of ways. For example, Lejava said, Georgian businesses could feel the impact of the reforms in the new standards for inspections - which will span from food safety to labeling products that Georgia imports.

"It is a global experience that the weaker the institutions, the more painful the reforms are. We cannot claim that we have the best institutions in the world," he said.

"And institution building and strengthening, and market surveillance and supervision should go hand in hand, which is not an easy task."

Good reforms, he said, will include transparent rules for inspection, check lists for inspectors - and strict limits on their discretion. It will also include clear procedures for litigation if businesses disagree with the government's assessment, and reasonable caps on fines.

Lejava underscored that, while EU standards are tough, countries are offered some leeway in how they are rolled out and implemented at home: for instance EU legislation does not define the size of the fines that should apply in Georgia, so Tbilisi has the authority to make them "proportional" to Georgian reality.

That also means the Georgian government has the power to apply other changes that Brussels requires to the reality on the ground. So, for example, in agriculture - a sector that will be sensitive to the cost of change - the government can exclude "non-industrialized activities," i.e. substance farmers in Imereti, from demanding regulations that are beyond their means.

"I think they [the Georgian government] need to very prudently start analyzing the impact of implementing the new regulations and trying to mitigate them as much as possible," Lejava said.

"The niche of EU regulations is that it is adopted by consensus and because it is adopted by consensus, it always has enough room that, on the one hand you can comply with them, and, on the other hand, find your own way of complying with them."

"No limit" on new opportunities

While Lejava said that the "pain" of the new regulations and responsibilities the government has taken on is guaranteed, he also stressed that "there is no limit" as to how much the EU deal can help the Georgian economy. Implemented well, the Association Agreement is an instrument for growth and prosperity.

That means the chance for more exports and investment - and the potential for the creation of new sectors and completely new businesses in Georgia.

"Nothing is limiting us to maximize the gain but also nothing is guaranteed on the minimal level either," he said. "I think what has to improve most is public administration. If public administration improves, I again trust the talent and the intuition and the knowledge of entrepreneurs that they will keep up."

Lejava noted, for instance, that by signing the Association Agreement, Georgia has a more realistic chance of falling under a Free Trade Deal with the US, since Washington is currently negotiating a US-EU trade agreement.

"There will be new businesses created by this opportunity that will relocate to Georgia," he said.

"So we are not talking about existing businesses; we should be talking about businesses which will be attracted to this opportunity [created by the Association Agreement]."