Some economic aspects of the Association Agreement

Posted by globalresearcheng on Jun 1st, 2014 and filed under Conferences. You can follow any responses to this entry through the RSS 2.0. Both comments and pings are currently closed.

The most discussed topic recently is EU-Georgia Association Agreement.

Diversification for a market is very good, especially when EU market is not an ordinary one; it is a market of the richest 500 million people of the planet. The question is, how much ready are we for this market, what is the benefit that we expect or will receive from the Agreement and will signing the Agreement trigger political-economic processes, that instead of improving our poor economy, deteriorate it?

Let’s review the conditions of the Agreement.

From the very beginning I would like to emphasize that I will not be discussing the topics such as standardization, European norms of sanitary and phyto-sanitary, etc. which, as you might be aware, are problematic in our country. I would like to discuss the Agreement only in fiscal direction.

First of all, it is noteworthy that customs duties are abolished within this Agreement, which is good.

The fact that the country will not have to pay customs duties while exporting its product and importing from abroad will result in the decrease of prices (let’s consider that accumulation of less amounts of money in the budget due to abolishment of customs duties will be compensated at the expense of the increased goods turnover), is welcoming. The fact that imported high-quality goods, because of its low prime cost will overwhelm our domestic production is not problematic at this stage.

Well, it will not overwhelm anything as there is nothing to overwhelm. But…. and there emerge many “buts”. As you know friendship is a bilateral type of relationship. Especially, when one of the friends is far stronger and insists to be your friend the intention should be proved by actions.

The list of products, exempt from customs duties, but at the same time taxed by the “market admission tax” while exported, given in the Annex II – B attracts attention.

The idea of the tax is that as Georgian product is cheaper compared to the one produced in the EU, will equal to the price of products on their internal market. In plain words, apple from Gori, Georgia should not be cheaper than the apple from Spain not to “oppress” it.

The list actually covers all the fruit characteristically grown in Georgia and some of the vegetables. Namely: cucumber, tomato, almost every type of citruses, grapes, apple, pear, peach, apricot, cherry, sweet-cherry, plum, etc. Unfortunately pineapple and banana cannot be grown in Georgia due to climate conditions. All the above listed products create profile of our agriculture. This is the Agreement we are going to sign.

As it is known, economy is the base of everything. Ignoring and putting this postulate on the second stage inflicted us a huge damage in the ‘80s. We should not make one and the same mistake twice.

According to surveys currently the number one problem in Georgia is unemployment. The country should be trying to solve this problem in the first place. For finding a solution to this problem as soon as possible, we should analyze the structure of the population of Georgia.

In Georgia the number of village population is high. According to the data provided by Geostat last year, 47% of the whole population live in village. This is especially high indicator. If we want to achieve tangible progress in terms of decreasing unemployment level on the backdrop of the above-given data, model of economic development, intended, in the first place, for involvement of this segment of population should be developed, which should be viable in economic terms and have development prospective.

Based on the above-stated, I consider that it is good, when the government helps its village population through various projects; however, it is not even near to enough. Establishing processing plants for agriculture products and obtaining stabile market for the processed product is necessary. This must be the main economic message for overcoming unemployment, which, on its part, is fully harmonized with the development of small and medium business.

The problem is clearly visible.

Due to Georgia’s current economic development, natural conditions, structural peculiarities of the population, lack of qualification of workforce and other factors, no other option exists. However, one main problem emerges here – the problem of sale’s market.

For developing any direction in economy, sale’s market is necessary. The Government should support national producers in gaining foothold on the export market. The State should ensure admission to and maintenance of sale’s market.

At the end of the ‘80s, selling of every factory in parts started in the country. We have squandered away everything. Economy was not developing. We have also lost the qualified workforce. The country had to import everything. Subjective factors causing the above mentioned, and the people interested in such developments, is another topic of discussion. Though the facts remain to be facts. In 2013, import equaled to USD 8 billion, whereas export was USD 3 billion, plus in this export USD 700 mln.accounted for re-exporting automobiles. Such is the situation that we are having today. Though, from the end of 2013 and starting of 2014 export has revived in the country. We should pay attention to this fact as it is further considered below.

In October, 2012, by the order of the European Commission, modeling of economic effects triggered by the above mentioned Agreement was conducted in the country. According to the research, increase of GDP by 1,7% in the short-term and by 4,3% in the long-term, as well as increase of export by 9% in the short-term and by 12% in the long-term is forecasted.

I think that the fact, that in January-February, 2014 only, export increased by 23% compared to the previous year, speaks itself. The increase is caused by the export on Russian market.

As we can see from the above stated, even the economic effect calculated by European experts does not have surprising effect, when the expectation of people is absolutely different.

Though, as I have mentioned above, generally, diversification of the market and gaining admission on a market of such magnitude and potential is a positive fact. This is unquestionable. But, there is one threat.

The possibility that signing the Agreement will result in problems of exporting our products to Russian market is high, which is bad. It is unfair though real. It was exactly ignoring reality which put us in the current state.

The unfortunate fact is that by today’s condition, if we want development of agriculture and its connection to the relevant processing industry, in order to create employment, it is impossible without Russian market.

So, what shall we do?

Should we not sign the Agreement?

The question should not be put this way. At least, today. This is a political issue.

In parallel with signing Association Agreement between Georgia and EU, the Government should conduct active dialogue with the government of Russia. Otherwise, we may end up in a very hard economic situation as the thesis: “implementation of Association Agreement will yield specific benefit to the citizens of Georgia”, is only an illusion.

In consideration of the Agreement conditions, current and potential future situation in the country and many other factors, it is only desirable.

The European market is totally imbued with the product that creates export profile of Georgia. Plus, on many types of such products tax for equaling the price of our product with theirs is added and there is lack of awareness on our product on Euro-market, etc.

Thus, if we leave alone the product which they did not release from the price with the reason of protecting their own product and look back at, let’s say, wine export from Georgia, we will clearly see that this reviving sector will get back to stagnation and crisis if Russian market closes for it. For example, in 2013, right after partial opening of the Russian market, 44% of the total export of wine went to the Russian market and it was only the beginning.

Thus, the decision on signing the Association Agreement, especially in its current form, cannot be equivocal.

It should be emphasized that the Chapter IV: Trade and issues related to Trade, is unequal for the parties. To leave all the rest alone, the Agreement sets restrictions only for Georgia.

Based on the all above-stated, if we lose the most “important” market in attempting market diversification, it will put us in more difficult situation than we are in today.

To summarize, everything depends on the Government and it is natural that they should bear responsibility in directing general policy of the country.

MamukaChkheidze, Economics expert.

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