Connections in the Caucasus

On December 10, I had the opportunity to attend the presentation of a new World Bank report on an already well-established topic–connectivity, or, as it is more often referred to as, globalization. Titled Critical Connections: Promoting Economic Growth and Resilience in Europe and Central Asia, this publication sees the light of day at a time when the long-term trend towards regional and global integration seems to have come to at least a temporary halt. Instead of embracing greater connectivity, many people around the world increasingly see nationalism and isolation behind barbed wire and ‘walls’ as remedies to uncertainty. This uncertainty is easily understandable, springing from rapid advances in computerization and automation, on the one hand, and the double whammy of immigration and outsourcing, on the other hand. Yet, it is far from obvious that “the problems that give rise to nationalism” can be solved by nationalism, as noted by UK Prime Minster Gordon Brown in a 2015 speech. Indeed, what the “Critical Connections” report argues is that while increased connectivity exposes countries to external shocks, the solution is not isolation, but rather broader and more diversified connectivity.

Focusing on Central Asia, Caucasus and Eastern Europe, the report argues that “international connectivity through trade, foreign direct investment, migration, telecommunications, transportation and other avenues facilitates the transfer of knowledge and technology that are critical to long-term growth and shared prosperity.” Especially, different aspects of connectivity complement one another. Migration, for example, enhances knowledge spillovers through trade and foreign investment by migrants transferring information on foreign markets, speaking foreign languages and helping build connections to foreign entrepreneurs.

Not all countries, firms or individuals play an equal role in diffusing knowledge as well as spreading other benefits of connectivity. A key role is played by those who have relatively stronger connections to further-away actors outside their ‘native’ cluster (think of a group of childhood friends, a sub-industry or a regional club of countries). At the same time, those who find themselves relatively isolated on the edges of a cluster are at a relative disadvantage.

As is well established in network analysis, “most social structures tend to be characterized by dense clusters of strong connections. […] An individual who acts as a mediator between two or more closely connected groups of people could gain important comparative advantages. […] The position of a bridge between distinct groups allows him or her to transfer or gatekeep valuable information from one group to another. […] Individual can combine all the ideas he or she receives from different sources and come up with the most innovative idea among all. […] A broker also occupies a precarious position, as ties with disparate groups can be fragile and time consuming to maintain.”

A good case in point of this connectivity, is transport connectivity in Central Asia and the Caucasus (see Figure 1). Georgia’s access to ports on the Black Sea and land border crossings to Russia and Turkey allows it to serve as a mediator for countries further to the east. In particular, it is the only ‘bridge’ for Armenian exports to Eurasia and Europe. Yet, a critical question is whether Georgia’s locational advantages for trade and transit are fully utilized from the point of view of ancillary businesses. As argued in “Critical Connections,” if a country’s economic and business environment is sufficiently attractive for investment … transit flows may increase export and import opportunities for firms along these routes (or corridors) develop new sectors such as logistics services, and generate nonmaterial benefits (flows of ideas and knowledge) to boost productivity. Firms located in transport hub countries may benefit from lower production costs and an improved ability to deliver on time. Higher transport network connectivity might be desirable for increasing a country’s participation in regional and global value chains, attracting FDI or increasing in participation in development corridors.”

As I considered these characteristics of networks and their significance, I was drawn to my own experience as a citizen of two different countries, and perhaps as a node in two different networks. As a child, I immigrated with my parents to the US, where I spent most of my childhood and adolescence before attending university. After graduating with a BBA from the Ross School of Business at the University of Michigan, I headed into a turbulent job market during the peak of the global financial crisis. After working various odd jobs, as well as at a medium-sized technology startup in the Chelsea district of New York City, I decided to pack my bags and return to the country of my ancestors – Georgia. Upon my return, I immediately felt out of place. The difficulty of adapting to the frenetic pace of life in the Georgian capital was compounded by the fact that I had left behind an entire network of friends, classmates, co-workers, etc. My remedy for this was straightforward: start from scratch. I set out to build a new network of friends, classmates, coworkers, etc., based not in the US, but in Georgia. And, so, here I am today: one foot in my American network and one foot in my Georgian network – with the ability to act as a connector.

So, what does all of this have to do with globalization and Georgia’s response to it? Georgia’s historic position as a hub between the larger networks of the East and West is a true asset that should be cherished and further developed. Thanks to its location and Janus-like cultural duality, Georgia should have little difficulty in dealing with shocks that are regional in nature. Unless hit by a shock of a truly global magnitude, Georgia should be able to utilize its ‘betweenness’ in order to rebalance its portfolio of economic activities, find new partners, stand up on its feet and walk again. The best illustration of this actually happening was Georgia’s economic recovery in the wake of Russia-imposed economic embargo in 2006-7. Having all eggs in one basket, on the other hand, comes with increased risks.

According to the World Bank, the multidimensional nature of connectivity is such that shocks in one dimension (e.g., trade) can adversely impact other dimensions (e.g., FDI). That is why, it is important to have a broad array of connections in order to reduce risks and better deal with shocks. This means that Georgia should strive to develop connectivity in all complementary dimensions, moving beyond trade and tourism to participation in global value chains and related foreign direct investment. This can best be achieved if Georgia remains open for business when it comes to its migration policy, and for investment. This can be accomplished, among other things, through free trade agreements, bilateral investment treaties, development of transportation and ICT, and migration policy.

The theory of networks can help us understand Georgia’s optimal response to the processes occurring in the age of greater connectivity. As such, Georgia should take heed and focus on its geographic advantages, while designing a strategy that will allow it to achieve its full potential.

By Rezo Surguladze