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Georgia cannot live on frog exports alone

November 29, 2010
ORTHODOX Christian Georgians are remarkably observant; and the Good Shepherd is an important Christian parable. Yet these days, good Georgian shepherds are giving thanks to Islam, with the Hajj ending on 18th November. Over the last three years, Georgia has found a new outlet exporting livestock to meet Muslim demand for ritual slaughter of sheep. Livestock is now Georgia’s ninth biggest export, above wine.

Last year, Georgia added an even more unlikely product to its export portfolio: frogs. With the bird-flu epidemic apparently pushing up international demand for frog meat, for some reason, over 250,000 Georgian frogs were transported to France in 2009; this year the figure should be far greater.

But although diversifying exports is a good thing, Georgia will not make much of a dent in its substantial trade deficit while it continues to import the most basic foodstuffs, such as fresh milk; Georgian brands sell milk reconstituted from powder.

Georgia’s recent economic history is one of extremes. Under communism, Georgian industry and agriculture supplied much of the Soviet Union. But the Soviet collapse brought catastrophe. In 1991, almost half a million Georgians worked in industry; by 2004, less than 100,000 did. Scrap metal from defunct industries became, and remains, one of the country’s most important exports. The collapse of the country’s agricultural sector (tea, meat, citrus, fruit and agro-processing) was the most severe in the former Soviet Union. As a result, in 2004 Georgian GDP stood at a mere 45% of its 1989 level.

This prompted the new government, under Mikhail Saakashvili, to embark on an ultra-liberal deregulation and anti-corruption drive. The results were spectacular: annual growth hit double-digit figures in 2006 and 2007, fuelled by high levels of foreign direct investment and strong credit growth. But neither credit nor FDI went to the export sector in any meaningful amount; construction, real estate, and other non-tradable sectors proved more profitable.

In 2008, two shocks hit the economy in rapid succession: the war with Russia, in August, and the global financial crisis. Foreign investors fled, leaving the economy to contract by 7% in 2009. Things are now looking brighter. According to the IMF, GDP will grow by 4.5% in 2010; the budget deficit, which reached 9.2% of GDP in 2009, has fallen to around 6.3%. But with a major Eurobond repayment due in 2013, the priority is to reduce the current account deficit, which stands at 12.6% of GDP, and to generate foreign exchange.

This is a daunting task. Foreign aid (some $4.5 billion was pledged in October 2008 after the war with Russia) will inevitably fall over time, leaving a hole in the balance of payments. Other mitigating elements, such as remittances from the Georgian diaspora, should remain, though subject to the fluctuations of the global economy. The real challenge for the government is closing the country’s huge imbalance between imports and exports.

The government is placing its hopes in FDI, which in 2009 dropped to a third of its 2007 highs. That may be overly optimistic: in 2010, FDI into Georgia has been more of a trickle than a flow. Rather than putting all their eggs in one basket, there is much more officials could do. Greater focus on Georgia’s domestic private sector’s investments could reap dividends. More energetic export promotion would help too.

Georgian officials are used to praise for their management of the economy: the World Bank’s "Ease of Doing Business" league table puts Georgia in 12th place. But they would do well to pay attention to international competitiveness rankings too. In the World Economic Forum’s 2010  Global Competitiveness Report [PDF]—a much broader measure than the World Bank's—Georgia comes 93rd out of 139 countries. Improving protection of property rights and of minority shareholders’ interests, and boosting the higher education and training of the Georgian workforce are just a few needed changes; there are many more.

The way in which Georgia turned its economy around since 2004 has been remarkable. But consolidating that position will require much more work.

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