On the 14th of February, the Ministry of Economy and Sustainable Development of Georgia published the draft version of the Socio-economic Development Strategy 2020 (SDS). This comprehensive document identifies the main socio-economic challenges Georgia will be facing in the next years and presents a strategy how to cope with them. The overall goal is to achieve sustainable and inclusive growth until the end of this decade.
The spirit of the document very much reflects the principles of the new government. There is no belief in the self-regulatory power of market forces anymore, which was a dominant guideline for the economic policy of the United National Movement. Rather, the SDS emphasizes the role of a proactive public sector in reducing unemployment and in promoting investments and exports.
One cornerstone of the SDS strategy is the diversification of the Georgian economy, in particular through the development of sectors that have export potential. Specifically, the government plans to unlock new markets for Georgian exports by strengthening the partnership with potential export destinations, for example through trade agreements. Moreover, the government plans to defend more actively the interests of Georgian exporters in international markets. The document also mentions direct assistance to companies that would like to export but are too small to do the necessary market analyses (i.e. evaluating how much demand there will be in a foreign market). The SDS document also speaks about the government helping in the promotion of Georgian products abroad and about upgrading strategic infrastructure, in particular in transportation and logistics.
WE SAW THAT BEFORE
SDS closely emulates the so-called export-oriented industrialization strategy (EOI), an economic policy that aims at accelerating the industrialization process of a country through export expansion. The approach performed impressively when it was adopted by the so-called “Asian Tigers”: South Korea, Taiwan, Hong Kong, Singapore, and Thailand. Important elements of EOI were also successfully implemented in Indonesia, the Philippines, and, most prominently, China.
It is an empirical fact that EOI has the potential to develop a country – in the end of the 1950s, South Korea was one of the poorest countries of the world. Today it is considered to be a fully developed country, playing in the same league as Japan and Western Europe. South Korea is not a recipient of development aid anymore, but has become a donor that helps other countries.
Interestingly, in the 1950s of the last century, the conditions in the above-mentioned countries were similar to Georgia. There was large-scale poverty, sharp inequality, high unemployment, and a low-skilled but cheap labor force. While it would be wrong to describe the Georgian labor force as “low-skilled”, the qualification mismatch on the Georgian labor market essentially has the same effect. From the point of view of a company, it does not matter whether there are no engineers and technicians because of a general lack of human capital or because people have learned the wrong subjects.
THE DEVIL IS IN THE DETAIL
So, does SDS lay out the road map for turning Georgia into a “Caucasian Tiger”?
Georgia is not the first country trying to copy the success stories of the Asian Tigers. Unfortunately, EOI policies do not always work as well as in Korea and Singapore. Though EOI appears to be a straightforward and rather simple economic recipe, the concept largely failed to develop countries like India, Pakistan, and Bangladesh.
The problem is that there is a lot of fine-tuning necessary for making EOI work, and, even worse, there are relevant factors that are not under the control of a country like Georgia.
An important factor contributing to the success of EOI are high savings rates for a long period of time, something that seems go well with Confucian values of humility and modesty, but conflicts with the post-soviet desire for conspicuous consumption. Likewise, the Asians were eager to become technicians and engineers, i.e. to build up exactly the kind of human capital that is needed for EOI, while most young Georgians dream of becoming lawyers and managers, and they notoriously avoid technical and mathematical subjects at the universities. Bluntly speaking, if the Georgians want to adopt EOI, they may have to work on their mentalities first, something that is often unpleasant and painful.
Even worse, the general circumstances for successfully implementing EOI may have been more favorable between 1960 and 2000 than they are today. For example, at first sight it might look as if world trade has become more liberal due to GATT, WTO and the like. Yet a country that wants to export, say, agricultural produce to the European Union, will get a nasty surprise. Export to the EU is discouraged by excessive sanitary requirements, the demand for exact certificates of origin, and the need to comply with a whole bunch of other EU regulations. The EU even prescribes a range for the bend of bananas to be sold in EU markets. Arguably, it is more difficult today to export to developed countries than it was 30 years ago.
Even more important, for being successful as an exporter, a country has to utilize on its “comparative advantages”. By the very concept, every country has a comparative advantage in producing something, but it is not the case that all possible comparative advantages one might have are equally beneficial. The comparative advantage in the production of advanced machinery and cars is arguably with countries like the US, Germany, and Japan. Supplying the world with advanced machinery is, however, very profitable. A comparative advantage for producing cheap textiles, plastic toys, or coffee beans, yields less potential for developing an economy. It is very questionably whether, at least at the moment, Georgia has a comparative advantage in the production of goods that foster affluence and prosperity – otherwise, our country would not be so poor.
So, while it is nice to outline an EOI strategy, the true challenges come with its implementation. The Asian Tigers could ride on the waves of various technological revolutions, in particular related to electronics, computers, and software, that took place in the last 50 years. Moreover, they were the beneficiaries of the exodus of many traditional industries, like textile production, out of high-income countries. An EOI strategy is something to be considered seriously, and it is good that the government creates documents like the SDS, yet the crucial question remains: What could a Caucasian Tiger provide to the world better than other countries?