Does Georgia Need More Factories?

Does Georgia Need More Factories?

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Georgia’s beauty and traditional hospitality make it a ‘natural-born’ touristic destination. Yet, without factories, it may be a country for very few Georgians. This is something our policymakers have to bear in mind when deciding on the country’s strategic direction.

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There is no simple answer to the question of whether or not Georgia needs more factories. When several years ago I sat down for coffee with the late Kakha Bendukidze, one thing we could easily agree on is that Georgia is never going to be an industrial powerhouse. Georgia’s men, we concurred, are simply not built (or, rather, raised) to man industrial production lines.

Trying to imagine Georgia’s future, we talked about exporting arts and crafts, and how the nation’s raw artistic talent could benefit from a better organization (a deficit Kakha wanted to address through an art management program at his Free University).

Yet, the sad truth is that while Georgian men may have a great reputation in arts, toast-making, and entertaining, relatively few of them will ever be able to make a living by practicing these skills. Likewise, claims to being the cradle of winemaking will not be sufficient for Georgia’s traditional agriculture to become a safe economic haven for more than a few thousands of Georgian households. One hectare – the typical plot size in Georgia – is simply not enough to sustain a family.

SHALL WE EXPORT GOODS… OR PEOPLE?

Potentially a paradise for environmentalists and tourists, a manufacturing-free Georgia might be quite hellish for a very substantial part of Georgia’s population – those who lack the skills and the aptitude for employment in modern services, be it hospitality, banking, public administration or Business Process Outsourcing (BPO).

In other words, Georgia faces an important political choice: to invest in export-oriented manufacturing (and thus absorb a part of its surplus labor) or to continue to export its working-age population – to visa-free European destinations, such as Poland, and other labor-starved countries.

WHEN REALITY AND IDEOLOGY CLASH…

Whatever choice Georgia makes, it should not necessarily squander the little manufacturing capacity it does have – by virtue of Soviet industrialization legacy or thanks to locally available agricultural raw materials and mineral resources (such as gas from Azerbaijan and local deposits of coal, manganese, copper, and gold).

Yet, the libertarian ideology that Georgia’s young ruling elite has embraced since the jolly days of the Rose Revolution rejects the very notion that governments should be doing anything to cultivate and protect local industry and agriculture.

According to this ideology, strong international competitors are to the domestic economy what predators are for an ecosystem: they are supposed to cull vulnerable domestic prey, such as the old, injured, or sick, leaving more ‘food’ for the survival and prosperity of healthy and productive enterprises. Also, by controlling the size of domestic business populations, international competitors may be counted on for slowing down the spread of disease (nepotism and corruption?) and teaching those surviving to run faster for their life (coming to work on time?).

Of course, predators may from time to time ‘catch’ very young prey (“infant industries”) and even healthy enterprises, but libertarians would consider this to be a reasonable price to pay for eliminating sick or injured ‘animals’, and promoting natural selection in which only the fittest businesses are left to survive and reproduce.

Underlying libertarianism is a substantial body of economic thinking. Yet, if turned into a secular religion of sorts, libertarianism (just like Marxism a century ago) may start interfering with people’s sense of reality. Thus, when presented with the immense challenge of Iranian steel products being dumped in the Georgian market, Giorgi Kobulia (until recently Georgia’s Minister of Economy and Sustainable Development), simply refused to see a problem. “If Iran wants to subsidize our construction sector, why should I complain?”

 

 

Iranian exports upending international trade. 

While Iran’s National Bank was ordered to maintain the official exchange rate at 42,000 rials against the dollar, rial’s black market rate tumbled to 110,000 against the greenback as of January 1, 2019. The possibility to sell hard currency earnings at the much higher black market rate gave Iranian exporters the opportunity to dump their products abroad at a fraction of their internal prices, exporting crisis to nearby markets. 

   

At the time of Kobulia’s conversation with Georgian steelmakers, Iran was going through a major currency crisis triggered by the renewal of US sanctions in November 2018. With the black market exchange rate of Iran’s rial plummeting, the country’s exporters were happy to dump steel and anything else abroad, triggering a major crisis for local producers of similar products, such as concrete reinforcement bars (‘rebars’).

Kobulia’s iron ‘bio-logic’ could have cost Georgia more than 2,500 jobs, wiping out the entire steelmaking ‘species,’ which was perfectly viable under normal circumstances. Luckily for the industry, the dumping of Iranian steel in Georgia has been eventually stopped by … the Iranian authorities’ success in clamping down on black-market currency exchange.

 GEORGIA NEEDS FDI, NOT FTA!

The Iranian dumping episode was not the first in Georgia’s history. In 2007, Georgia pompously celebrated the opening of GeoSteel, one of the country’s largest FDI projects and a major producer of rebars. However, when I visited Rustavi-based GeoSteel in March 2016, the company was practically paralyzed because Ukrainian and Russian steel products were inundating the Georgian market. A sharp weakening of domestic currencies made Ukrainian and Russian exports much more competitive in international markets. Europe and US – until then ardent promoters of free trade – have sealed off their markets with tariffs and anti-dumping investigations. Georgia remained absolutely open, creating a major threat for those very few Georgian companies that engage in manufacturing activities.

To his credit, Hardeep Singh, GeoSteel’s CEO, was able to retain a healthy sense of humor. “Georgia does not need any more FTA,” he told me. “We already have FTAs with lots of countries. What we need is FDI! You can only trade when you have something to sell, and Georgia’s agriculture and industry don’t have much to offer.”

Georgia’s international trade environment is highly volatile, and often unbalanced and unfair. Over the past several years, Georgia's major trade partners – Russia, Ukraine, Azerbaijan, Turkey, and Iran – have all gone through dramatic currency devaluations, changing the terms of trade between them and Georgia, and threatening whole sectors of the Georgian economy. Moreover, some of them use unfair restrictions to prevent Georgian companies from accessing their own markets.

Yet, in the minds of Georgian policymakers the very concept of “protection” has been for too long strongly associated with corruption (such as when protective tariffs are slapped on foreign products in exchange for a bribe), and “protectionism” (an ideology seeking to develop local industries behind insurmountable tariff and non-tariff barriers, to the detriment of domestic consumers).

Such an ideological view of protection policy tools is wrong and harmful. When one country subsidizes its farmers and then starts dumping agricultural products on its trade partners, the latter have every right, according to the World Trade Organization (WTO), to close their markets. Anti-dumping policies belong into the toolkit of legitimate "safeguard measures" in WTO terminology and are commonly utilized by the US and the EU. 

Generally speaking, WTO members are allowed to take a range of temporary safeguard actions, such as restricting imports of a certain product so as to prevent permanent injury to domestic production. In other words, temporary safeguard measures are meant to provide a degree of insurance for investors (risking their financial capital) and workers (risking their jobs and human capital) against unfair competition or drastic changes in a country’s terms of trade.

THE TIMES THEY ARE A-CHANGIN'?

Things may be finally moving in the right direction with Natia Turnava’s appointment as Minister of Economy and Sustainable Development on April 18, 2019. With less than a month on the job, Turnava visited Rustavi’s metallurgical companies and told reporters that Georgian manufacturers do “need support in the domestic market.” Hallelujah!

The government’s support is likely to take the form of assistance with investment in energy-efficient and eco-friendly technologies, as well as passing anti-dumping legislation consistent with WTO rules and procedures. As I was told by EU-financed experts working on this legislation, the new law may include a “social interest” clause, allowing the government to consider not only producers’ interests but also those of the final consumers and user industries, such as construction companies, in case of rebars. That may be a good compromise considering the role international competition does play in promoting technological upgrading and healthy management practices.

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Georgia may never become the world’s manufacturing hub. Its beauty and traditional hospitality make it a natural born touristic destination. Yet, Georgia without factories may be a country for very few Georgians. This is something our policymakers have to bear in mind when deciding on the country’s strategic direction.

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