German Economic Team Georgia

Project Goal

The German Economic Team Georgia advises the Georgian government regarding economic reforms. This supports the process of transformation towards a social market economy, and economic development in general.

GET Georgia develops independent analyses and concrete recommendations for action with local partner institutions. GET Georgia also informs the public, businesses, relevant institutions, and organizations about economic topics and current developments in Georgia.

Background

Against the backdrop of an association agreement between the European Union and Georgia, the Georgian government signaled interest in counseling concerning its approach to the EU. GET Georgia has been commissioned by the Federal Ministry of Economic Affairs and Energy to support Georgia as it faces the opportunities and challenges the association agreement will bring. It is especially important to strengthen the Georgian economy with regards to its export power in order to contribute to economic growth, job creation, and a reduction of the current account deficit. This requires new investments in production and services. The opportunities the association agreement creates through market access and free trade have to be utilized, which will require consistent follow-through from the Georgian government on reform policies.

GET Georgia’s consultation focuses on strategic questions of economic politics and a successful economic approach to the EU, and is therefore significantly different from the consultation provided by other international actors in Georgia, which focus on the technical implementations of individual proposals.


Examples of Our Work

Work Assignment

The Georgian Ministry of Economy and Sustainable Development requested advice on strengthening Georgian exports. One question of particular importance was which sectors offered the potential for development in Georgia and which could successfully attract investors.

Background

Georgia’s export structure has remained unchanged and poorly diversified for some time. The ten most important export goods make up 66 % of total exports. Some metal products, agricultural products like wine, mineral water, and nuts, and services in the areas of tourism and transport (transit traffic) make up the bulk of Georgia’s economic profile. This means that shocks in single markets can have noticeable negative macroeconomic effects. Furthermore, Georgia has specialized in the production of goods with relatively low added value. This has a negative impact on income levels and the long term development of the country.

A diversification of export goods would provide significant advantages for Georgia. The poorly diversified structure, even in a small country like Georgia, points to undiscovered and underutilized possibilities in other sectors, which could quickly generate sustainable and much needed growth as well as increase added value. Further, the dependence on a few goods could be reduced.

Our Approach

The economic structure of a country can only be influenced by politics to a small degree. Its economic characteristics are significantly more important: How scarce and productive are capital and labor? Which areas might have experience? Where can economies of scale  be created through existing structures?

Attempts to change the economic structures of various countries through the targeted promotion of particular economic sectors – especially towards capital- and technology-intense sectors – have generally failed, since these policies have ignored these countries’ economic foundations. However, the reverse – that economic policies should not pay any attention to sectoral development – does not hold true; a country has to approach potential investors and demonstrate which opportunities exist and are politically viable. Many political decisions – infrastructure investments, for example – can have dramatic effects on different sectors. To determine what that effect might be, objective analysis is necessary to uncover a country’s potential and challenges beyond its known strengths and weaknesses.

GET Georgia developed these analyses with an innovative, empirical model. A data set encompassing the export specializations (Revealed Comparative Advantage, RCA) of different countries made it possible to show development patterns – specialization in labor-intense primary products in the automotive sector, for example, often correlates with specialization in the textile sector, which also requires cheap and flexible labor. Through these development patterns, GET Georgia could show how Georgia’s specialization might develop within the next 10 years. Four areas showed particularly impressive potential, both with regards to value-added intensity and as first steps towards more technology intense products:

  • Energy-intense goods like aluminum, zinc, and fertilizers
  • Light products with relatively low engineering complexity (as a first step in this sector)
  • Corporate services
  • An expansion of the range of agrarian products and food

Abstract analysis, however, is not enough to generate policy recommendations. GET Georgia also conducted concrete analyses on the respective potentials of the four economic areas identified that address the specific demands of these sectors and their feasibility in Georgia. These analyses confirm their empirically determined potential, showed Georgia’s positive and negative factors of competition in these areas, and gave policy recommendations to strengthen them.

Georgia’s economic specialisation: Present and future

Georgia’s Ministry of Economy and Sustainable Development uses the results of our analyses in two ways: First, the study is used to inform potential investors of these hitherto unknown possibilities, and thereby strengthen the investment attraction of Georgia. Berlin Economics’ (GET Georgia) authorship of the study, and thus the independence of the analysis, contributes to the positive reaction the results have seen. Second, our results are included in political decision-making processes, e.g. about infrastructure investments and regulation reform.

GET Georgia was involved in the use of these studies for the attraction of investment. In cooperation with the Georgian embassy and the Eastern Europe Business Association of Germany, GET Georgia organized an informational event for German investors and entrepreneurs that took place in June 2015 at the Georgian embassy in Berlin.

Partners

 

 

 

 

 

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