How Georgia can unlock its economic potential

Having lived in Tbilisi for almost three years now, I continue to be fascinated by the contradictions of the Georgian story.

On one hand, Georgia has achieved significant economic growth over the past decade, successfully introduced much needed governance reform, and become synonymous with world leadership in terms of doing business (ranked in the top 15 and better than some OECD countries).

On the other hand, the country has been dogged persistently by high poverty rates – among the highest in the Europe and Central Asia region. And, despite a highly improved business environment, unemployment rates remain in the double digits: official unemployment is currently around 15 percent!

So, how can Georgia ensure both strong growth and social sustainability? In my view, export-led job creation is the key to unlocking Georgia’s full potential.

We know some of the arithmetic behind sluggish job growth in Georgia: a short history of reforms before the Russo-Georgian conflict in 2008 and the global financial crisis, relatively slow productivity growth in the export sectors, and increased unemployment as less efficient sectors of the economy shed workers faster than growing sectors could absorb them.

We still do not see signs of a scaling-up in production. If jobs are to be created, this scaling-up is essential. However, given the small size of Georgia’s economy, this will only be possible through far stronger export performance.

Georgian exporters have been relatively successful at creating jobs compared to domestically oriented firms, and even compared to exporters in other countries across Europe and Central Asia. However, while Georgia’s exports tripled in value between 2006 and 2012, the regional crisis around the economic contraction in Russia and Ukraine has since wiped out much of the gains made. Even with exports of goods and services at over 40 percent of GDP, the trade deficit is nearly 18 percent of GDP as of 2014.

One of the most significant challenges that export firms in Georgia face is survival. The other challenge – which is related – is improving export sophistication. Nearly two-thirds of Georgian exporters exit foreign markets before their first year is up – a significantly higher proportion than other countries in Europe and Central Asia.

Georgia’s main goods exports remain primary products, with scrap metal emerging in importance now that the used-car re-export market is winding down (following stricter environmental regulations in key markets like Azerbaijan).

Product diversification is especially important, but over 80 percent of Georgia’s export growth has so far come from traditional products going to traditional destinations. Firms argue that their biggest constraint is the inability to compete – given the high fixed costs of entry into new markets. In addition, high transportation costs drive up the prices of some Georgian products, including its most sophisticated export – wine.

While foreign investment yields clear dividends in terms of productivity growth and employment, capital has historically been more likely to flow to Georgia’s non-tradable sectors, especially real estate.

So, what can Georgia do? For a start, investment in export promotion and in strengthened logistics and supply chain management, including through public-private partnerships, can unleash potentially high gains, as will active promotion of foreign direct investment in export sectors.

Labor mobility in Georgia will certainly need to be strengthened – which is a challenge because of the large concentration of employment in agriculture – but, as opportunities expand in the private sector, we should see workers moving in response. A skills strategy, developed jointly with the private sector, would also help here.

For Georgian exporters to be able to create jobs back home, it is critical that they can stay in business and deepen the exporting relationship – ultimately strengthening the link between trade and labor market outcomes. Perhaps then, we will see Georgia’s true potential.

This post first appeared on The World Bank’s Eurasian Perspectives Blog. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Rashmi Shankar is a Program Leader for the South Caucasus, Europe and Central Asia at the World Bank.