Never Waste a Good Crisis

Achieving economic independence from Russia will be costly in the short-term, but may be well worth it.

Mass demonstrations in front of the Georgian Parliament are typically a sign that Georgian politics are pregnant with change. The violent phase of the ongoing popular uprising appears to be largely over after more than 240 people were injured when protesters tried to storm the Parliament building on June 20, but peaceful crowds continue to gather on “Georgia’s perpetual street of protest” for (at time of going to print) the fourth straight day.

The protesters’ current demands have little to do with the event that triggered the crisis – a Russian MP’s ill-conceived attempt to occupy the chair of the Georgian Parliament Speaker. What they want, according to reports in Georgia’s media, is (Minister of Interior) Giorgia Gakharia’s resignation, the release of detained protesters, and an immediate shift, already in 2020, to proportional party-list elections to the Georgian parliament. The latter demand is significant in that it would eliminate the primary cause of ruling party supermajorities emerging in Georgian parliaments ever since independence. Georgian Dream leaders would do well, for themselves and the country, to accept this fairly benign demand [EDITORIAL NOTE: The Georgian government agreed to this request on June 24].

In the meantime, the protesters have already scored a fairly consequential victory by triggering a temporary (?) Russian ban on flights to and from Georgia starting July 8. Declarations aside, this move by the Russian strongman could potentially bring Georgian-Russian economic relations back to square one, freeing Georgia from its dependence on the Russian/Eurasian Union market and the whims of Russian political leadership.

Achieving economic independence will come at a significant economic and political cost in the short term, but may be well worth it.

BETTER A HORRIBLE END THAN HORROR WITHOUT END

It is widely known that Russia is currently by far the largest market for the exports of Georgian traditional food and agricultural products (wine, water, lemonades, fruit, vegetables and greens) and traditional tourism services. If denied access to the Eurasian Union market, Georgia will have to heavily invest in the quality of its products in order for them to be marketable in Europe, North America and Asia.

What is less well understood is that the Russia-led Eurasian Union is far more important for Georgia’s economic prosperity than is suggested by the relatively modest share of agriculture and hospitality in the Georgian GDP. This is so because these labor-intensive industries (under) employ well over a half of the Georgian population. Moreover, the vast majority of people working in the traditional sector of the Georgian economy have no alternative employment options or savings to fall back on. They live very close to the poverty line and can ill afford even a temporary reduction in income.

Finally, while precise statistics are not available, Russian and other CIS country investors are heavily involved in the Georgian real estate market – buying thousands of properties in places like Batumi, Gudauri and, of course, Tbilisi. Slogans like “Go home, occupiers” will make Russian-speaking investors feel less than welcome in Georgia, putting an end to any further acquisitions and potentially triggering a sell-off.

All this means that Georgia should be bracing for an economic and (potential) financial crisis that should not be wasted.

NO VENTURE, NO GAIN

While Georgia is touted as a global leader in economic reforms, too many Georgians remain “stuck” in subsistence agriculture and low-paid trade and hospitality jobs. For example, of all those employed in agriculture, only about 11,000 (less than 1.3% of total agricultural employment!) were hired workers in 2016, presumably employed in commercial farming activities. The overwhelming majority of the rest were self-employed (or, rather, under-employed) in semi-subsistence and subsistence agriculture on very small plots of land. According to the latest Georgian Agricultural Census, in 2014, 77% of all Georgian holdings owned less than 1ha of agricultural land (87%, if considering only arable land).

Unorganized, operating on tiny plots of land, and lacking in leadership, skills, infrastructure and essential support services (e.g. machinery, veterinary centers), Georgian peasants remain in agriculture due to old age (the average Georgian farmer is about 55 years old and aging), emotional attachment to their land, and a lack of other opportunities. External interventions in the sector, government subsidies, donor-financed loans and grants, certainly help alleviate rural poverty but fail to fundamentally change farming and business practices in Georgia’s countryside. Perhaps unintentionally, they also slow down the smallholders’ exit from traditional agriculture.

Not only are too many Georgians stuck in low productivity jobs, whole parts of the Georgian economy are stuck in a “bad” equilibrium involving a lock-in on traditional products, traditional technologies and traditional (ex-Soviet) export markets. Georgia’s exports to the EU did grow in recent decades, but Azerbaijan and Eurasian Union countries remain the main (re-)export destination for most Georgian products.

Having so many eggs in the Russian/CIS basket represents an economic and political vulnerability. Importantly, however, this is also a symptom of the underlying problem: dependence on tourism and a very small number of traditional agricultural products that are not price- and quality-competitive outside traditional markets in which Georgian products enjoy a special, nostalgia-based recognition.

Escaping from the traditional equilibrium is easier said than done since the prices Georgian products and services fetch in Russia and CIS may be unattainable in other markets. Moreover, meeting the food safety and quality standards imposed elsewhere (consistency over time, homogeneity, traceability) is a daunting task in value chains dominated by a multitude of small, independent producers who are not linked to downstream buyers (consolidators and processors).

These structural factors have been reinforcing the lock-in on traditional activities to the detriment of those attempting to modernize the Georgian economy and guide it towards the more price- and quality-competitive markets of the future. Instead of reaching out to new markets, Georgia has been simply following the easy path to its traditional buyers in Russia and other CIS countries.

As we all know from our personal lives, getting out of one’s comfort zone (a “bad” equilibrium) may require an external shock, a “good crisis.” This point is best illustrated by what happened to the Georgian wine industry in the wake of the Russian ban in 2006. Thus, while causing a lot of pain in the short run, last week’s protest rallies may trigger very significant changes in Georgia’s political and economic landscape, rendering Georgia more competitive and resilient to ‘meddling’ and manipulation by powerful political actors and neighbors.

About the author:

Eric Livny is Founder and President at Tbilinomics Policy Advisors and Chair of Economic Policy Committee at the International Chamber of Commerce (ICC Georgia).

By Eric Livny