ISET

ISET Economist Blog

A blog about economics in the South Caucasus.

Becoming Rich Delayed

During my morning shower, I like to think about Georgia’s economic prospects and how the country should develop.

Since the Rose Revolution, there was a lot of “catch up growth”, i.e. growth that stems from returning from a state of chaos to normal economic conditions. Yet a country cannot catch up forever, and the only possibility for an emerging economy without substantial natural resources to sustain high growth is to profitably interact with the rest of the world. Usually, while I put shampoo on my hair, I start thinking about what Georgia could deliver to the world. And here the difficulties kick in.

The main problem is that there are no technological revolutions on the horizon of which the Georgian economy could take advantage. The new technologies of the past, like electronics, software, and industrial novelties, were essentially the only opportunities for countries without oil to make long-lasting development leaps. Korea could only catch up with Europe and the US in the last 50 years because it rode on the wave of consumer electronics. When Korea entered the scene, the world was in need of places to produce computer chips, personal computers, hi-fi systems, and cameras. Korea, like many other Asian countries, offered the necessary labor force at low prices. Yet Georgia cannot repeat this success because new grand technologies that are about to come up, e.g. everything related to robotics, genetic engineering, and artificial intelligence, do not require the inputs Georgia has to offer. It is hard to see how Georgia could take advantage from one of those new technologies.

When some weeks ago the Israeli ambassador visited ISET and discussed ways how Georgia could develop its high-tech sector, I was not as optimistic as many others in the audience. In my opinion, Israel in the 1990’s was riding on a technological wave, and their success cannot be replicated in the 2010’s. In the 1990’s, the emerging internet industry needed exactly what Israel had to offer, namely highly creative, entrepreneurial-minded, and extremely well-educated people. Today, the internet industry has become mature, there is one big player (the USA) and a few smaller players (like India and Israel), and I do not see how Georgia could gain ground in a matured internet industry.

Many other suggestions how Georgia could develop do not convince me either. True, Georgia has breathtaking natural treasures, and tourism is definitely something that should be promoted (because of the employment it provides to low-skilled people and several positive externalities). But is there any country in the world that became rich through tourism? Likewise, Georgian agriculture has great development potential, but modern agriculture needs lots of machinery and technology but little labor input. If agricultural productivity would really pick up, what to do with 50% of the labor force currently working in agriculture? When countries develop, they move away from agriculture, but if Georgia moves away from agriculture, where is it moving to?

There are also those who believe that Georgia could become a financial hub. This is least convincing to me. First of all, I do not see Georgia’s special advantages in finance. Even more importantly, a financial industry is doing nothing else but allocating capital and wealth produced elsewhere in the economy (or abroad). In Georgia, there is not that much to allocate. A financial industry without manufacturing is like a factory where everybody is a manager (and nobody is producing something).

At this point, I usually leave the shower and start my day as a depressed economist in Georgia. But this morning, I stayed a bit longer in the hot water and started dreaming about Georgia’s future as a manufacturer…


YOU WON’T GET RICH IN A FORTNIGHT

Some development economists sound like sellers of dubious diets promising to “lose 20 pounds in 14 days” or like spam emails offering to pay “$4,000 per week working from home”. These economists suggest that a country just has to adopt the right policy and becoming rich is virtually inevitable. They less often talk about the fact that all countries that managed to move upwards on the development ladder needed decades for that.

Perhaps, the economic situation of Georgia will improve, but it will not be a matter of years, but a matter of decades, maybe of centuries. If things go well, Georgian children of today will live long enough to find themselves in a substantially better economic situation, but just when they are in the middle of their lives and have children themselves, not in 5 or 10 years, and maybe not in 20 years from now.

The bold promises of development economics are reflected in the policy agendas of developing countries, talking about “knowledge economy”, financial hubs, high-tech and the like. But in a market system you just get rich if you sell something people like to have. And people like to have things that are done well. So, Georgia should do those things it can do well, and I do not see why that would be knowledge products, financial services, or high-tech.


MAKING GOOD SIMPLE GOODS

About 15 years ago, a headline shocked the German public. The share of high-tech products among the German exports had for the first time fallen below 50%. There was a big fuss about it, and the minister of economy said that this was the “worst news he had heard in his entire career”. Everybody saw it as a weakness of an economy if it produced simple goods rather than high tech. I think, however, that the conclusions drawn from this news were mistaken. It is not a weakness but a strength if – despite of high wages and high labor standards – a country can produce simple goods.

Germany demonstrates that one does not have to produce high-tech to become rich with manufacturing. While textile industry has largely fled Europe and moved to countries like Turkey, Philippines, and Bangladesh, Germany still has companies like Trigema with more than 1000 employees producing t-shirts and tennis clothes – exclusively manufactured in Germany. Actually, in a Smart or a Goodwill supermarket it is surprising to see the many simple goods that are produced in Germany and then exported to Georgia. German imports to Georgia range from shampoo (Nivea), cleaning agents (Frosch), various foodstuff like chocolate (Ritter Sport), candies (Haribo), marmalade (Schwartau), frozen pizza (Dr. Oetker), salad sauce (Kuehne), to electric shavers (Braun) and simple plastic toys (Playmobil). All of these, and one could make the list much longer, are distinctly low-tech products.


MY RECIPE

I believe that Georgia should not hope for becoming rich overnight by doing high tech or other fancy stuff. The country should produce commodities of solid quality, drawing on a resource that is abundant in Georgia: decent, diligent people who do not demand high wages.

As described in my article on Georgian Decency (to be found on the ISET Economist Blog), one of the most striking experiences one makes in Georgia is that Georgians almost never cheat. This is a character trait perfectly suited for manufacturing, as fraud is one of the main risks when running a factory, e.g. employees plundering the equipment. This happened, for example, many years ago, when Israel handed over to local operators an experimental farm it had built in Africa. After half a year, all equipment was stolen. In Georgia, there would be no problem like that.

The manufacturing I have in mind should start with simple products. Textiles, shoes, food, mechanics, building material, simple chemicals, electric devices and the like, aiming at taking back market shares from Western importers. For this to be successful, the Georgian products must be sold much cheaper than the Western imports, compensating for lower quality and the lack of brand names. This should be possible, given the lower transportation and production costs. It is rather puzzling why at the moment price differences between imported and domestic products are often so small.

Simple products create jobs for simple people. Manufacturing, and nothing else, is where the 50% of the workforce currently doing agriculture will find employment.

And becoming rich will follow in 50 years from now.

Rate this blog entry:
4 Comments

Related Posts

Comments

 
Guest - Adam on Monday, 19 May 2014 19:26

The answer, I believe, is to stop using shampoo. I never get to that stage, and therefore I see continuing growth on a "catch-up basis" alone.

Just witness, for instance, the recent espresso revolution which has hit Tbilisi, where now one can find a Lavazza espresso just about everywhere. That is catch-up growth.

Arguably, catch-up growth could include growth in the agro-processing sector or in small-scale manufacturing, as you've discussed above. It could also take place at the SME level, which it continues to do in Georgia.

It's unlikely that Georgia will experience structural change at a pace you've discussed above any time soon (in particular, the movement of labor from agriculture to the manufacturing and services sector) which has taken place historically in many countries. What might be more likely is a unique form of structural change, that from subsistence agriculture to broader exchange relations, agroprocessing (e.g., including the wine sector, processed foods, etc.), and some rural small-scale manufacturing much like you've described.

The answer, I believe, is to stop using shampoo. I never get to that stage, and therefore I see continuing growth on a "catch-up basis" alone. Just witness, for instance, the recent espresso revolution which has hit Tbilisi, where now one can find a Lavazza espresso just about everywhere. That is catch-up growth. Arguably, catch-up growth could include growth in the agro-processing sector or in small-scale manufacturing, as you've discussed above. It could also take place at the SME level, which it continues to do in Georgia. It's unlikely that Georgia will experience structural change at a pace you've discussed above any time soon (in particular, the movement of labor from agriculture to the manufacturing and services sector) which has taken place historically in many countries. What might be more likely is a unique form of structural change, that from subsistence agriculture to broader exchange relations, agroprocessing (e.g., including the wine sector, processed foods, etc.), and some rural small-scale manufacturing much like you've described.
Guest - Eric Livny on Monday, 19 May 2014 20:44

I tend to conclude my early morning procedures with a cold shower, and hence tend to agree with both of you :).

Florian's main point is well taken: Georgia has no chance of becoming the next Israel, not in the next 20-30 years. Adam is also right: catch up growth has not been fully exhausted as yet.

We are in basic agreement that the greatest growth potential for Georgia is concerned with shifting excess "workers" out of subsistence agriculture into more productive employment. The question is where? Some new jobs are being created in commercial agriculture and services. But these are too few to bring about major structural changes. Such changes can only come about through investment in manufacturing. And if manufacturing, then agro-processing is one area where investment is already happening big time and where Georgia is likely to see a lot of more happening in the future. Some investment takes place to substitute for imports (e.g. frozen US poultry is being replaced by "chilled" locally produced poultry, German chocolates with Georgian ones). Access to the Russian market triggered (partially-Russian) investment in the mineral water and wine industry. Access to the EU market can trigger European investment in food processing using unique Georgian inputs such as hazelnuts.

Energy-intensive processing - based on cheap hydroelectric resources - could be another interesting growth area, but the current strategy of exporting electricity to Turkey prevents businesses from seriously considering this possibility. Thus, not only is this strategy unrealistic, it is quite harmful as well. And there are other harmful ideas in circulation. Take, for instance, the notion that Georgia has to develop SMEs. Well, almost all Georgia has is SMEs. And these SMEs are extremely low on capital and hence extremely low on productivity. More SMEs - small shops, barbers, and souvenir shops - will not create many new jobs, let alone high productivity jobs. For that Georgia needs imported capital and technology that small SME cannot attract.

I tend to conclude my early morning procedures with a cold shower, and hence tend to agree with both of you :). Florian's main point is well taken: Georgia has no chance of becoming the next Israel, not in the next 20-30 years. Adam is also right: catch up growth has not been fully exhausted as yet. We are in basic agreement that the greatest growth potential for Georgia is concerned with shifting excess "workers" out of subsistence agriculture into more productive employment. The question is where? Some new jobs are being created in commercial agriculture and services. But these are too few to bring about major structural changes. Such changes can only come about through investment in manufacturing. And if manufacturing, then agro-processing is one area where investment is already happening big time and where Georgia is likely to see a lot of more happening in the future. Some investment takes place to substitute for imports (e.g. frozen US poultry is being replaced by "chilled" locally produced poultry, German chocolates with Georgian ones). Access to the Russian market triggered (partially-Russian) investment in the mineral water and wine industry. Access to the EU market can trigger European investment in food processing using unique Georgian inputs such as hazelnuts. Energy-intensive processing - based on cheap hydroelectric resources - could be another interesting growth area, but the current strategy of exporting electricity to Turkey prevents businesses from seriously considering this possibility. Thus, not only is this strategy unrealistic, it is quite harmful as well. And there are other harmful ideas in circulation. Take, for instance, the notion that Georgia has to develop SMEs. Well, almost all Georgia has is SMEs. And these SMEs are extremely low on capital and hence extremely low on productivity. More SMEs - small shops, barbers, and souvenir shops - will not create many new jobs, let alone high productivity jobs. For that Georgia needs imported capital and technology that small SME cannot attract.
Guest - Adam on Tuesday, 20 May 2014 12:09

A timely discussion. The GoG just announced the following program: http://agenda.ge/news/14407/eng

A timely discussion. The GoG just announced the following program: http://agenda.ge/news/14407/eng
Guest - Yuval Fuchs on Wednesday, 21 May 2014 21:32

my humble impression there is more than one opinion about it in Georgia. My understanding the WB does believe in developing Innovation and the Government has just introduced a state agency for Innovations, though in a wider sense than high-tech and knowledge industries. I guess the discussion will go on, and so will the process of urbanization - at least in the long run. Focus on WHAT is one thing, another is HOW to do things. This second question is as important as the first one. My impression there is a positive learn process on both questions. Of course it will take a while, but the discussion - and actions taken already - are needed stimulation. Any way the Georgian economy will go one thing will be needed either way - creativity or the ability to imagine one make a change. I believe Israel could play a role here.

I am not sure which side should I take on the shower debate :)

my humble impression there is more than one opinion about it in Georgia. My understanding the WB does believe in developing Innovation and the Government has just introduced a state agency for Innovations, though in a wider sense than high-tech and knowledge industries. I guess the discussion will go on, and so will the process of urbanization - at least in the long run. Focus on WHAT is one thing, another is HOW to do things. This second question is as important as the first one. My impression there is a positive learn process on both questions. Of course it will take a while, but the discussion - and actions taken already - are needed stimulation. Any way the Georgian economy will go one thing will be needed either way - creativity or the ability to imagine one make a change. I believe Israel could play a role here. I am not sure which side should I take on the shower debate :)
Already Registered? Login Here
Register
Guest
Thursday, 09 April 2020

Captcha Image

Our Partners