The FINANCIAL — The United Nations Development Program in Georgia, in cooperation with the Ministry for Economic Development conducted a feasibility study on the perspectives and challenges of a potential free-trade agreement between the European Union and Georgia.
“The main aim for the country in terms of economic and social development is overcoming poverty and unemployment. In this respect, developing economic and trade links with all countries, especially EU member states, is very important for us. We have already embarked on a stage of political negotiations which led to the decision of conducting a study on the readiness of Georgia for such an agreement and its impact on the country, said the Georgian State Minister for European and Euro-Atlantic Integration. “The study has shown that Georgia is ready to sign a free trade agreement with the EU. The results of the study are highly valuable to us, as it proves that ongoing reforms in the country are successful. We are proud of these results, and perceive it as one more step taken towards signing a free trade agreement with the EU.”
Conducted by a group of international and Georgian Experts, funded by UNDP- Georgia, the study examines the effects that the agreement will have on Georgia and the EU’s economies, and analyzes the linkages between trade and human development. It also provides key recommendations on how a free-trade agreement and Georgia’s trade policy can be used as a powerful tool for economic development.
“Economic relations between Georgia and the EU are developing with great intensity. At present the EU is the most important economic partner for Georgia. Signing a free trade agreement with the EU is of paramount importance for our country and therefore a main priority for us.
Numerous reforms have been undertaken to make trade with Georgia economically more beneficial and attractive. Today our country has one of the most liberal trade regimes worldwide with extremely low tariffs and minimal non-trade barriers,” said Tamara Kovziridze, Deputy Minister of Economic Development of Georgia.
“The United Nations Development Program and the government of Georgia have a complete harmonization of interests when it comes to enhancing the prosperity of the country and using that prosperity to further attack and alleviate the amount of poverty that we find in Georgia. We have been working very closely with the government in the area of economic reforms, specifically reforms undertaken to strengthen the private sector of the country,” said Robert D. Watkins, UNDP’s Resident Representative in Georgia. “We believe that it is through the private sector that real, long lasting and durable economic growth is going to come to the country. The government has been taking significant steps over the past four years towards strengthening the private sector, reducing corruption, simplifying laws and procedures for the registration of new business and liberalizing trade especially with neighbouring countries. Though the reforms have resulted in a very favourable outcome we believe that there is still more to be done, especially in the area of the judiciary.
Evaluating Georgia as a Rapidly Growing Economy the study indicates that in 2006, Georgia experienced a 9.4% increase in real GDP and grew at a rate of around 12.5% during the first half of 2007. The 2007 report of the Doing Business project of the World Bank and IFC ranked Georgia as the number-one reformer in the world and 37th in the ease of doing business. According to the 2008 Doing Business report Georgia was number 18 in the ease of doing business and held a place among the top ten performer countries. In 2006 the government invested GEL 633 million (EUR 275 million) in the spheres of healthcare, education, roads and regional infrastructure, which is 51% more than the GEL 419 million (EUR 182 million) invested in 2005. In 2007, according to the state budget, this figure was to further increase by another 36% to reach GEL 681 million (EUR 374 million). Additionally, the minimum pension has been doubled in 2005 and tripled in 2007.
“Underlining philosophy for UNDP is that prosperity largely rests on forging strong ties with neighbours in the region and throughout the world. This study is going to help the government of Georgia to establish very long lasting economic ties with the EU. In this study we have made a number of recommendations and it is up to the government to decide which recommendations it would like to take on board. We do believe very strongly that extending liberal access to the European market will greatly contribute to Georgia’s prosperity. Georgia already benefits from a special arrangement with the EU, a (GSP+) free trade agreement will take the relationship one step further and help Georgia become a full commercial partner as well as position Georgia as a regional trade and commercial centre.”
The Key Results the study has lead to is that the Georgian government and citizens have put impressive amounts of effort in to improving, in a span of a few years, the quality of public governance in Georgia.
This has been achieved in the spirit of openness to foreign trade & investment, and of sound monetary policy: Georgia has chosen lower trade barriers unilaterally including non-tariff barriers. The country is also committed to public debt reduction and the government has been deprived from the possibility to borrow from the Central Bank.
The results so far are good, both in terms of GDP and of human development (including reducing corruption). Consequently, the average monthly wage was multiplied by two between 2003 and 2006 and policies are being implemented so that the majority of the population can benefit from the rapid growth of the economy.
These results are not accidental. The manner in which Georgia overcame the recent sanctions imposed by Russia testifies to the strength in this trend. In spite of a ban on Georgian exports and a sharp increase in the price of gas, the Georgian economy kept growing at the same pace in 2006 (a 9.4% increase of GDP).
An FTA between Georgia and the EU will have little or no impact on fiscal revenues: As shown by the model based-simulation, the loss in terms of fiscal revenues should be, in 2012, somewhere between GEL 7 and 12 million. In 2012 it would represent at worst 0.07% of GDP.
An FTA will have a positive, though minor impact on all sectors of Georgian production: Output should increase faster with liberalization than without one, and this will imply to all sectors. The earliest noticeable increase should occur in the manufacturing industry (it will grow by 0.2% faster than if nothing is done), and the lease increase in the services industry (0.08% faster).
An FTA will increase the household’s purchasing power and nominal GDP: If further trade liberalization takes place, final consumption will increase faster (both in terms of volume and in value). In 2012, the growth would be of 0.12% above the growth that would occur if nothing is done. The Consumer Price Index would be lower (-0.02% below the no-change scenario in 2012).
All trading partners of Georgia, including the EU, would benefit from FTA: Exports would increase slightly (0.01% above the no-trade scenario in 2012) and imports as well (with a minimum of 0.28%). This pattern would apply to all trade partners. In the case of the EU, by 2012 exports would increase by +0.38% faster and imports by 0.02%. There is no threat that FTA will result in trade diversion since Georgia is already a very open economy and the EU one of its main trading partners.
Foreign Direct Investments are expected to rise following an increase in trade: FDI have been increasing briskly for the last three years (almost threefold). Georgia’s performance in attracting FDI has been well above average. Due to the characteristics of the country and the reforms undertaken, this trend should persist and largely cover the small increase in trade deficit.
Georgia should stick to an export-promotion strategy: An import-substitution strategy would harm the economy. Therefore, the government should keep promoting the most productive sectors.
The FTA would be of great support for the present government engaged in a courageous program of reforms, it will be an important message to the international community.
To capitalize on an FTA, Georgia must carefully implement the already enacted reforms: An FTA opens new windows for trade and therefore for production. These opportunities will be grasped only to the extent that the various costs associated to entrepreneurship are low. The necessary reforms have, for the most part, been enacted. One must now ensure that they will be properly implemented.
This might require not only an extra emphasis on training administrative staff, but also judges. Higher education should be an object of great attention.
To derive all the benefits from an FTA it is important to create or reinforce a trade policy unit, to continually improve certification and customs infrastructure and make sure that the various parties (Small to medium-sized business enterprises and foreign investors) are well informed of the situation.
An FTA would be welcomed by a population which, as revealed by the polls, is looking forward to a stronger relationship with the EU: a large majority of Georgian citizens when asked in April 2006 as to which organization they would like to join if they had to choose only one, chose the European Union. And furthermore, 43% of the population believes this could happen in the next 5 years.
Not signing or postponing an FTA would be sending mixed signals to the population, foreign investors and regional partners. There would be no economic advantage in postponing or slowing down the move towards further integration of the EU and Georgian economies.
“I think that the most important factor we have to keep in mind is that having such an agreement between Georgia and the EU sends a very clear message to the rest of the world, that Georgia and the EU have a mutual desire to enter in to a long-term and stable business and politically friendly relationship. I think that this kind of signal more than anything else, more than all the other factors, is the most important, because this is what is really going to draw investors to this country and assist the country where the benefits of prosperity are shared by all,” said Watkins “This is the very first study of its kind in this region and we are hoping to replicate it in Central Asia. UNDP is happy to have the opportunity to undertake it, largely because of the openness and flexibility of the government and the very positive environment we have been able to work in.”
One of the recommendations the study has lead to, is supporting the Ministry’s Department of Foreign Trade and International Economic Relations to become more effective in order to professionally analyze trade information and policy, formulate negotiation positions and successfully advise the government. Responding to this recommendation, UNDP is starting a USD 70.000 project with the Ministry for Economic Development. UNDP’s assistance will include a four-month training program for the Department of Foreign Trade and International Economic Relations. The project is funded by the Swedish International Development Co-operation Agency (Sida).
