In the globalized world of today, increasing national competitiveness has become an important policy target for any country. While engaging in mutually beneficial trade, technological and cultural exchanges, countries find themselves in a race for scarce mobile resources such as financial capital and talent. Winning in this race are those locations that offer the best conditions for economic activity – skilled and disciplined labor force, high quality services and urban amenities, transparent and efficient public administration, etc. These locations – not only countries, but also regions and cities – serve as magnets for investment and people, and are able to grow and reach prosperity, the ultimate goal of economic policy.

In the context of the European Neighbourhood Policy, the EU and Georgia are in the process of negotiating an Association Agreement (AA) to replace the current Partnership and Co-operation Agreement (PCA). A Deep and Comprehensive Free Trade Agreement (DCFTA), underpinned by regulatory approximation, will be part of this AA. This study supports the negotiation process by analysing how the trade and trade-related provisions of the DCFTA will affect economic, social and environmental developments in the EU and in Georgia.

The main objective of this Trade Sustainability Impact Assessment (TSIA) is to assess the potential economic, social, environmental and human rights impacts of a Deep and Comprehensive Free Trade Agreement (DCFTA) to be negotiated between the EU and Georgia. This TSIA combines quantitative and qualitative research, in line with the general methodology designed for TSIAs by DG Trade. This methodology covers the following elements: screening and scoping analysis, scenario analysis and quantitative modelling, additional quantitative and qualitative social, human rights and environmental impact analysis, causal chain analysis and sectoral analysis.

Georgia’s growth performance since independence has gone through extremes, from an unprecedented -44.9 percent in 1992 to 12.3 percent in 2007. Although growth rates temporarily fell in the aftermath of the Russian-Georgian war and the world financial crisis they have since then recovered to 7 percent in 2011. With on average robust GDP growth since the Rose revolution economic growth seemingly should not be of particular concern to policymakers. On the other side, in this study we find that economic growth in Georgia is mainly driven by total factor productivity growth, and not by capital accumulation or increases in the labor force. This finding reflects the significant improvements in the economic and business environment in Georgia since the Rose Revolution, and can be explained by a catch-up effect through which Georgia converges to the higher levels of total factor productivity in other economies. On balance this is good news, but it also raises two concerns. First, about future growth prospects given that high productivity growth rates are hard to maintain as Georgia catches-up. Second, in contrast to economic growth driven by capital accumulation growth driven by productivity improvements does not in itself generate employment. Given Georgia’s persistently high unemployment rates we thus try not only to answer the question how economic growth can be raised, but also how capital accumulation can be fostered.

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