ISET

ISET-PI analyzed the potential for Georgia to specialize in the production of several types of engineering goods: Insulated wire and cable; Pleasure and sport vessels; Cargo containers; Derricks, cranes, and straddle carriers.

The analysis of the current situation in Georgia and on the world market revealed very limited current production in the engineering sector and showed that technology generally is not up-to-date.

Past infrastructure in the engineering industry in Georgia has either been abandoned or is largely technologically outdated, which has caused a need for the sector to essential start from scratch. In the team’s comparative analysis of Georgia versus other Eastern European and Asian countries, we have identified three key competitive factors: An analysis of Human Capital showed competitive wages, but limited qualifications of the workforce. Consequently Georgia is initially most suitable for production techniques that call for low-skilled industrial labor. Additionally, Georgia has excellent business environment with relatively sound levels of political stability with low administrative tax burdens. Finally, the outlook for transportation and supply-chain logistics is heavily dependent on the type of good in question, although the newly constructed East-West highway is mitigating many problems in this regard.

Oil prices have endured a large and persistent decrease due to increased worldwide production and the weakness of global demand. Prices are soon expected to stabilize around USD 60/barrel. ISET-PI and GET have focused on the improved terms of trade that Georgia could potentially see due to its high share of energy imports compared to its GDP indicators. This dynamic could cause an indirect albeit upward change in demand for Georgian goods.

World market price changes fully transmit to Georgian oil price and because of this, the research team expects and immediate effect on the Georgian economy as worldwide prices for energy fall.

Using USD/GEL exchange rate as of February 2015, the team modeled the effect of a 41% decrease in world oil prices and calculated the macro-level effects of saving GEL 503 m in 2015. The forecasted result is a 2.3% increase in disposable income in the Georgian GDP.

For resilient economic development in Georgia, the country should encourage exports of higher-value added goods. In this report, ISET-PI and GET have found that Georgia might be able to develop a comparative advantage when it comes to exporting higher-value energy-intensive products. According to projections of its electricity network operator, Georgia will develop excess capacities of low-cost electricity in the next decade. The policy challenge is twofold. Attracting investments requires high prices and a stable regulatory environment. Both conditions can be achieved by increasing market integration with Turkey. Conversely, integration leads to high electricity prices in Georgia, making the country less attractive to electricity intensive industries.

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