Cultural and intellectual achievements herald the economic success of a people, and the Chinese cultural and intellectual heritage is breathtaking. The Chinese discovered gunpowder, the compass, and the movable type printing press long before the Europeans. Admiral Zheng He’s fleet reached Mogadishu and Mombasa with up to 28,000 sailors at the same time when the Europeans set out to discover Africa with crews of not more than 300 sailors. Temporarily lamed by Mao and his followers, capitalism has unleashed the dragon once again! China is about to become the major global economic power soon, and many pundits already now declare the 21^st to be a “Chinese Century”, as opposed to the 20^th being an “American Century”.

Recently, Georgia came into the focus of attention of Chinese businessmen. The Chinese Hualing group considers the realization of a huge commercial center near the Tbilisi Sea, called the Hualing International Economic Zone. The project was negotiated and signed with the previous government and aims at nothing less than creating a new city near the Tbilisi Sea with a population of up to 200 000 people. This new district of Tbilisi would have the modern public infrastructure, it would include an industrial park with processing plants and logistics centers, a trade area, office blocks, and a 5-star hotel. According to the plans, commercial operations would already start by 2015. Is this a chance for Georgia to profit from the economic verve of the Chinese?

The Hualing Economic Zone being built

THE PURPOSE OF THE ZONE

In Georgia, the debate about this project revolved around three dimensions – demography, culture, and economics. While recently, the first two drew a lot of public attention, the economic aspects of the project were perhaps not fully appreciated.

The project by Hualing International would be one of the largest investments in Georgia within the past two decades. It is not only large because the amount of invested money is huge, but primarily because its implementation may have significant consequences for the Georgian economy at large.

Since the 1990s, Chinese companies, often supported by the government, implemented similar projects in various developing countries, in particular in Africa and Southeast Asia. In most cases, the primary goal of such ventures was natural resource extraction and the opening up of new markets for Chinese products. As natural resources are arguably not the primary driving force behind the Chinese engagement in Georgia, one may speculate that its natural strategic location on the crossroads of Europe and Asia is what makes Georgia interesting for the Chinese. Like the caravansaries along the ancient Silkroad, Tbilisi could once again serve as a logistics hub for facilitating Chinese exports to the Caucasus, Turkey, and the European market.

How the project will affect economic and social matters in Georgia depends very much on the specific economic activities Chinese companies will carry out. If extensive logistics and manufacturing will pick up in Tbilisi, this may offer jobs for thousands of Georgians. If it is mainly about importing and re-exporting Chinese products through the zone, with very little value-added locally, the impacts may be much more limited. Unfortunately, there is only scarce information available on how exactly the Chinese want to earn money in Georgia, so the following analysis is speculative in character.

SHORT-RUN IMPACTS ON THE GEORGIAN ECONOMY

The contract between Hualing International and Georgia states that during the first 10 years, Hualing International will be exempt from value-added tax (VAT), profit taxes, and dividend taxes. During the first five years, there will be no property tax. In addition, no import tariffs on construction materials, machinery, and inventory for the hotel have to be paid until 2015. Georgian companies serving the same markets as the zone might face difficulties to compete with businesses that work under such favorable conditions.

If the contention is right that the Chinese want to use Tbilisi as a logistics basis for their exports to the Caucasus and its adjacent regions, there may be higher imports of machinery and equipment, footwear and clothing, lamps, toys, and furniture to Georgia. Many of these goods are not produced in Georgia on a sizeable scale and Georgian producers will therefore hardly be affected. Yet the competitive pressure for importers and retailers may increase considerably, and local marketplaces like the “Lilo Mall” may feel the arrival of the Chinese very strongly. Some of the imports, however, may indeed compete with local produce. Talking about furniture, currently, the Georgian producers have to cope with European and Turkish imports that often serve the high-end segment of the market. Introducing China as an additional major provider of (cheap) furniture may severely tighten the competitive pressure for local producers.

LONG-RUN CONSEQUENCES

While increased competition yields the risk that some Georgian producers and retailers may be crushed by the additional competitive pressure, there may be advantages in the long run. Those Georgian firms that finally survived the harsh competition will have bettered their productivity, cost structure, and improved the quality of their produce. While being a painful process, in this way tighter competition will foster innovation and creativity in the local economy in the long run. Moreover, a more sophisticated economy requires more advanced human skills. As a result, the value of human capital in Georgia will increase, leading to more resources flowing into on-the-job and vocational training, while at the same time efforts will be made to improve the public education system.

One may also hope for technological spillovers from Chinese firms if these would engage in technologically advanced activities. Utilizing technological spillovers that emerged from Western companies producing in China allowed the Chinese to quickly close the technological gap to the Western countries, and Georgia could take China as a role model in this respect.

Finally, the government would benefit from any economic activity induced by the zone, even if there were no VAT and profit taxes. Georgian personnel will have to pay income taxes, and people working in the zone will also make purchases outside the zone on which VAT does apply. Finally, the Georgian government will not grant tax advantages to the Chinese firms forever. Once these advantages are removed, additional income will accrue to the government.

Europeans and Americans may be culturally closer to the Georgian mentality, but when their economies are lame ducks that do not move, one should try out to ride on the Chinese dragon.