Issue 3, 2015. June-July



TBSC Consulting's Paul Clark and Tengiz Lomitashvili research the impact of EU Association Agreements on developing economies to determine which sectors of the economy benefit more from the EU's Deep and Comprehensive Free Trade Agreement (DCFTA).This article was originally published in EU Finance Magazine in May.

At TBSC Consulting,we are often asked which sectors of the economy will grow faster than others or which sectors are most favorable for investment. Of course we have opinions, based on working in and studying the Georgian economy for more than 15 years. Nevertheless, when asked questions of this type, we usually choose to not give definite answers without further research. We have found that the correct answer nearly always depends on the details of the particular question asked.

The EU-Georgia Association Agreement (AA) will have a large impact on the Georgian economy. A client recently asked us if manufacturing is likely to outperform other sectors of the economy due to the Deep and Comprehensive Free Trade Agreement (DCFTA), which is part of the AA.We did some preliminary research, including considering the experience of the New Member States (NMS) of the EU after those states signed their AAs in the 1990s. Some results from that research are shown here. To be clear, this is not academic research. Rather, it is focused on answering practical business questions from clients.

All Roads Lead to Growth

Georgia signed its AA with the EU in June 2014. The AA will have a significant positive impact on the Georgian economy (estimated at about 6.5 percent of GDP) though the effect on different sectors will vary widely. To better understand those different effects, we studied the sectoral experience of the NMSs that signed AAs in the early 1990s and acceded to the EU in 2004. One could argue that Georgia now is at the stage of economic development (with the EU), where those NMSs were in the mid-1990s.

NMSs signed AAs from 1992 through 1997 and acceded to the EU in 2004 and 2007, respectively. For the initial analysis, described here, we took the period from 1995 through 2004 as the study period. This is the phase in which Georgia finds itself today (i.e., just after signing the AA).

"Soft Sectors" VS. "Real Sectors"

Using national account data from EuroStat, known as the nama_nace10_c, we examined changes in Gross Value Added (GVA, at basic prices) for eleven major sectors between 1995 and 2004. Comparing the GVA in 1995 and 2004, we calculated Cumulative Annual Growth Rates (CAGRs).

The following chart shows the CAGRs of the EU-15 (the 15 existing Member States before 2004), the 10 NMSs as a group and each NMS individually. The first row shows the CAGR for the entire economy. The later rows show the CAGRs for eleven sectors that total to the entire economy. We grouped the sectors into three types: soft, real and other. This grouping is not academically oriented, but it helps better answer the question from our client.

Cells in the chart are green if the CAGR for the sector is 10 percent or greater than the CAGR for the whole economy. The green cells can be considered to be the Winner sectors, those sectors that outperformed the whole economy (after signing the AA). Cells are red if the CAGR for the sector is 10 percent or more less than the CAGR for the whole economy. The red cells can be considered to be the Loser sectors, those sectors that underperformed the whole economy. Even Loser sectors showed positive growth rates; those growth rates were just less than for the whole economy. Cells are yellow if they are between the Winners and the Losers. Yellow cells can be considered to be the 50-50 sectors, those sectors that have generally performed the same as the whole economy.

Soft sectors are mostly Winners; they are generally green. Real sectors are mostly Losers; they are generally red. Other sectors are mixed.This means that, on average, soft sectors grew appreciably faster than real sectors among the NMSs after the AAs were signed.

This does not mean that the real sectors did not grow in the NMSs.

Comparing the CAGR for the EU-15 and the NMSs shows that in nearly all cases the real sectors grew faster in the NMSs, as a group and individually, than was the case in the EU-15.

The real sectors among the NMSs grew well, just not as fast as the whole economy.

"Soft" Winners Shine

Overall results are shown in the following charts. The above chart shows CAGRs for the ten NMSs. The overall CAGR was 8.5 percent, shown by the horizontal blue line. Results varied by sector.

Most soft sectors performed better than the whole economy, shown with green bars. All real sectors performed worse than the whole economy, shown with red bars.

The lowest CAGR among all sectors is agriculture, at 3.1 percent; said differently, all sectors grew at 3.1 percent per year or more.

The chart below shows CAGRs for the EU-15. The overall CAGR was 4.5 percent. The overall CAGR for the EU-15 is much less than the overall CAGR for the NMSs. Results varied by sector. All soft sectors performed better than the whole economy. All real sectors performed worse than the whole economy, though construction was exactly at the whole economy CAGR.

TBSC Consulting ( is a general management consulting firm in Tbilisi, Georgia. Its consultants have been advisors to managers and to boards of directors of companies worldwide for more than 30 years. TBSC Consulting provides services in Market Entry and Expansion; Performance Improvement; Policy and Decision Analysis and Real Estate and Hospitality. Paul Clark is the Director, and Tengiz Lomitashvili is a Managing Consultant and Partner, of TBSC Consulting.