DOI:  10.36172/EKONOMISTI.2021.XVII.01.ADEISHVILI

Expanded Summary

The role of the industrial policy in Georgia becomes increasingly important as its economic growth has slowed down in the last decade, mostly as a result of lower productivity growth.

Nevertheless, the industrial policy still gets very little attention in the Georgian economic literature. The paper gives the short history and the review of the debate in the world economic literature and what the important findings that were made. The purpose of the paper is to discuss the case of Georgia and to suggest that the conducted studies may not be sufficient to shape the industrial policy recommendations. Various geopolitical, economic, demographic, etc., factors create various states of market failure, which imply that there is no one-size-fits-all approach, even if the binding constraints to competitiveness and key sectors of different countries seem similar. 

Key words: Georgia,industrial policy, export diversification, premature de-industrialization 

The main purpose of the paper to estimate the chances Georgia’s economic convergence through the literature review. In Georgian economic literature the notion of industrial policy is coming back with a caution.  For the purposes of the discussion, it is suggested that the industrial policy’s ultimate goal is to achieve steady leaping growth rate through mainly productivity increases. Which sectors can provide high levels of productivity convergence in Georgia?  Multiple studies prove that the structural reforms remain essential to limit the scarring in Georgia’s medium-term economic potential and promote higher and more inclusive growth (IMF, 2018).

In 90-s Georgia went through a phase of premature de-industrialization that resulted in the high share of service sector at the expense of industrial sector decline and “removed the main channel through which rapid growth has taken place in the past” in Asian economies. (Rodrik, 2015). The paper compares Georgia with other countries with similar or worse starting position  in terms of their GDP per capita and trade openness, but that managed to reach much higher growth rates steadily since 1985 through industrialization and export diversification. The research made by the leading economist suggests that economic convergence, through productivity convergence in manufacturing sectors and export diversification that was possible at the end of 20^th century and beginning of 21- may not be possible given the transformation in global value chains for the last 10 years.

What are the chances that Georgia may achieve the rate of export diversification that causes solid opportunities for high economic growth with the existing narrow production base and the starting point of being among the worst performers among peers in terms of product diversification (IMF, 2018). The assessments of Georgia’s potential to diversify its export products though the product space analysis concludes that not only the opportunities for future diversification are limited, but Georgia also faces challenges to upgrade its merchandise exports to more complex,  higher value-added products. This, a very pessimistic forecast, for the Georgian economy’s convergence opportunities, is backed by the well- known paper that studies correlation of ECI with the potential of GDP growth. It shows that Georgia has the worst potential of economic growth among the countries with the similar and even smaller level of GDP.

What are the policy implications for the country with a small domestic market and such gloomy forecast? Is Georgia  trapped in a poverty vicious circle? Does the analysis of the Georgia’s sectors competitive advantages can give the answer to the question – how to do the economic miracle? How likely that the policy implications, derived by IMF from the conducted analysis, namely: “In term of choosing potential products to diversify, a country should strategically consider producing products that 1) are similar or closely linked to the existing products because they employ similar know-how and hence are more efficient to produce; 2) are connected to many other potential products or at the core of the product space; and 3) provide more economic complexity”,  will help to shape the industrial policy measures?

In order to make more conclusive industrial policy recommendations the conducted studies should be complemented with the analysis of the global value chains, current trends in  international trade and foreign direct investments. That will help to explore Georgia’s opportunities to participate in (a) European value chains, (b) the regional value chains, its cons and pros, (c) and cons and pros of being integrated into the growing Chinese value chains (last years’ significant increase in Georgia’s exports to China may suggest the existence of realistic chances in this direction.) Moreover, and there is still the need to answer the following question: should Georgia, with its less economically complex economy implied by ECI, focus on export product diversification or it is more cost-effective to target export product sophistication?