Author: Nicholas Lazare Kvaratskhelia
After the de jure dissolution of the USSR, marked by the watershed moment of the Belavezha Accords, the newly formed Georgian Republic broke free from the isolated communist block. It instituted an agenda to assimilate the nation into the globalized, free-market World. Now, over 30 years later, after withstanding separatist conflicts, civil war, war with Russia, the 2008 financial crisis, and the COVID-19 pandemic, the battered and bruised independent Georgian economy managed to maintain an impressive ~5% growth rate from 2005 through 2022. The country underwent a pseudo-laissez-faire policy promoting a free market economic structure, intensively liberalizing all sectors of the economy through which it attained the title "the World's Number One Reformer" in 2007 and is undoubtedly one of the leading countries in terms of westernization in geopolitics and economics from the FSU.
Although internationally ranked as a smaller economy, the country has a relatively similar GDP to Cambodia, having a population of 4.5X less and being 2.5X smaller in size. Population and size don't paint the complete picture of any nation; if that were so, one could argue that Denmark and Switzerland wouldn't have "made it" either, which, of course, is not the case. Indeed, countless factors sum up the condition of an economy, and it's unfeasible to predict how one may develop; elements from which Georgia was cast away and instead were undoubtedly undergoing a far worse reality than its Western European partners. Nevertheless, history has shown us that economic miracles happen, and the East Asian paradigm is the primary argument for the claim. Thus, Georgia, with its singularly unique political, geographical, and economic circumstances, projects its plan correctly, it can become an economic miracle itself. To make the proposition a reality, one must fully grasp and analyze the modern picture of a developing nation, implicate historical economic strategies that are still relevant, disregard those that are not, and carefully align the policies for each unique case to fit the given circumstance.
Economists Dani Rodrik and Joseph E. Stiglitz wrote in incredible volume and detail about the new development strategy for developing nations and the end of an era of Export Oriented Industrialization(EOI). Rodrik stressed that: "Not all jobs are created equally" and that the government must advocate a three-pronged strategy of restructurings in the economy: "First, encourage lower-skill job creation by the larger firms that operate in non-tradable services. Second, provide public inputs and access to productivity-enhancing investments for smaller enterprises. Third, invest in technologies that complement rather than replace low-skill workers in service sectors." However, American Economist Tyler Cowen argues that the matter is less existential and that the future will likely introduce economies oriented toward service-export industries (SEI), internal trade, and consumer-led growth.
The paper will be structured in the following manner: (1) Fundamental Complications – the section in which the primary, long-term problems of the Georgian economy as a developing nation will be addressed in detail with possible solutions; (2) Distinct solutions – the part in which solutions to the stated problems of the Georgian case will be labeled and inscribed; (3) Deduction – the final part of the paper in which personal thoughts concerning this profound obstacle will be summed up. The paper's main focus is to underline primary problems common to developing economies and unique to this specific epitome. Sections will include modern views concerning the correct strategy for developing nations like Georgia and what macroeconomic steps it must take to attain the right path to prosperity.
Lastly, add a word of thought to the reader directly. I am a firm believer in what I believe to be accurate; nevertheless, as an advocate for individuality and critical thought, I would highly encourage you, the reader, to make your judgment concerning the issue and examine other sources to make up your personal opinion instead of sightlessly trusting a single view of the matter. Suggesting what is or isn't an optimal implementation for such grandiose matters as "a country's future economic development strategy" will most probably bear some lapse or peccadillo. To quote the famous American-Canadian economist and ambassador John Kenneth Galbraith: "Nobody can predict the future, least of all economists."
Fundamental Complications
1.1 The East-Asian Miracle
Only a handful of historical samples may moderately fit Georgia's idiosyncratic socio-economic state of affairs and distinctive drawbacks. Be that as it may, it also faces fundamental economic issues that many developing nations face in other parts of the globalized World. To correctly sum up how things are different for developing countries today, we must understand the reality in the past for nations in analogous situations.
The general trend since the 1990s has shown that developing economies struggle far more to jump from developing to developed than those in the 1960s-70s. These are most notably countries categorized in the East-Asian economic miracles, like China, Taiwan, South Korea, Singapore, Japan, and Vietnam. Virtually all of the countries that were part of this newly Industrialized and developed nation bracket underwent a similar process. Take the case of the last country to end the chapter of the trend – Taiwan – around 50 years ago; it was a relatively poor nation with an agricultural makeshift settlement in an authoritarian military dictatorship; continuing, it became a critical low-cost manufacturing destination in the Southeast Asian sphere, and today it stands out as one of the most censorious economies in the globalized World with among the leading industries centered in Taipei City.
Similarly, South Korea and Singapore initially established a unique brand of benign authoritarianism. Like the Taiwanese case, they also figured that their countries being in a state of hopelessness required a temporary dictatorship that could effectively–through decisive force and discipline– pressure the population to cogently and commandingly enlarge the economy. Under Lee Kuan Yew's administration, Singapore's government reclaimed most of the privatized land for below market rates and utilized it to construct affordable public housing – an essential step towards bringing the economy from poverty. LKY – the first prime minister and the man now recalled as – the father of the nation – served for 31 years, famously stating: "I am often accused of interfering in the private lives of citizens. Yes, if I did not, had I not done that, we wouldn't be here today" (To the Straits Times, April 1987).
Through such benevolent authoritarianism, the East-Asian economies instilled absolute focus, time, and resources to structure foundational institutions necessary for an advanced economy. The banking & financial systems, housing, transportation, healthcare, and even construction were heavily aided by the government in a controlling manner. Most notably, however, the creation of export-oriented industrialization was all too common and critical for these countries. South Korea became an essential automobile, technology, and steel exporter, all companies that the government virtually entirely financed, managed, and planned. Profound companies like the "Hyundai Motor Company" received contracts and support from the South Korean government to undertake large infrastructure projects like highways and dams, contributing to the nation's development. Later on, the government financed it further heavily to diversify its gaze and concentrate on the automobile industry. Exquisitely, Samsung also had a similar upbringing: Samsung's growth was significantly aided by government support during the nation's industrialization drive in the 1960s-70s. Although it wasn't a government-owned company, Samsung benefited from close ties with the government and received protectionist policies and financial aid, allowing it to grow into the global conglomerate we know today. Other companies established in Japan, like SONY, Toyota, Panasonic, and HONDA, had similar upbringings. The same story also holds for Taiwan's TSMC, EVERGREEN, or HTC – the World's leading most advanced electronic devices & elements manufacturer companies.
Such benevolent authoritarian leaderships are rare and dangerous, especially for countries that have a past with a culture of corruption and lack of belief in democracy. Additionally, even though South Korea, Japan, and Taiwan are well-established and continuing democracies, introducing authoritarianism as a way to rule in contemporary geopolitics for developing nations may not be the most optimal choice, given that such action requires absolute trust from the public toward state officials. It also endangers the belief and cultural acceptance of democratic values and institutions if it lasts for an extended period.
1.2 The issue of Brain Drain
A cardinal barrier facing Georgia is Brain Drain: Substantial emigration or migration of highly skilled & productive individuals resulting from political turmoil or more favorable professional opportunities elsewhere like better salary or improved lifestyle. Undeniably, it is a process that has the potential to solidify countries' positions in the global economy and make it almost impossible for people to join the ranks of the 30 or so existing advanced economies. Now, to fully catch why developing nations have a strenuous time becoming advanced, one must have a rough definition of what a developed economy is; although not necessarily precisely defined, contemporary economists believe that it's an economy with a well-functioning and somewhat regulated market system, annual GDP per capita of a minimum of 20 000$USD, a high score on the human development index (HDI), and a center for newfangled & highly technical industries. (source: IMF)
All the above factors result in an economy that is most favorable for not just the people living there but those who aren't and are seeking to. Indeed, the issue of brain drain arises here, the notion that developed economies are generally better places to live in from a strictly economic point of view with higher salaries and better HDI scores. For example, according to Bloomberg, an average engineer working in India in 2022 has an average wage of 800 000₹ (rupees) – an equivalent of 10 00$USD, April 2024 – whereas if that same engineer moved to the United States, he would earn a staggering 10-12X times the income he earned previously. Additionally, the US offers far better living conditions and is far less dense in population, with a far lower Air Quality Index (AQI) than India's heavily polluted air condition. Thus, if a window of opportunity opens for such highly productive professionals living in developing nations to move to better economic and social conditions, they most likely will take it. This is clear given that the most productive workforce in most developed economies arrived from developing countries and was issued to stay.
Such a reality significantly damages the developing country given that it loses its most productive, highly skilled, and relatively young workforce; the segment of the population that is most productive drives innovation and entrepreneurship and pays the highest tax (most of the time). Even more so, the developing economies face the harsh and ungrateful reality of unforcefully catapulting these trained professionals just before they no longer stay as economic burdens. They leave at a roughly young age just as they finish up with their academia and pursue a high-paying career; during the years of study, however, they take from the economy much more than they contribute, given that they produce nothing during their time in universities. Such an investment is optimal for governments and parents to make, given that the adolescents later become highly-skilled workers who contribute significantly to the economy in developing specific advanced sectors of the economy and, driving innovation & creating value. In contrast, the parents will be looked after once they become economic burdens. Once they reach retirement age, they will need a financial helping hand.
Georgia undoubtedly faces this problem, given that the migration of highly skilled and productive young workers is increasing. According to the State Commission on Migration Issues of Georgia, there has been an annual rate increase of migration from Georgia to the EU, USA, Turkey, and Russia of around 0.4%, which is high for a country that has a population of around 3.7 million people. Although these skilled workers send remittances to their families living in the country, the productivity and value created within the borders would unquestionably aid the economy far more than bank checks abroad.
1.3 Solutions to Brain Drain
The sad fact is that advanced economies will invariably be a more attractive destination for highly skilled workers than developing ones. Salary being one reason is also a component of the multiple reasons like the fact that most advanced economies have a high HDI score, far less corruption, pollution, and crime, tend to lean to more neo-liberal democratic values and offer advanced healthcare systems with well-structured institutions. This is not true for all cases, but it is the general trend and reality of most situations.
To reverse this dire reality of most developing countries, the governments of those economies must act to attain somewhat similar or at least financially & economically attractive conditions. If living conditions at home are acceptable for ordinary people, productive workers will differ from leaving and staying. Thus, they'll create value and business. Hence, the correct approach is to strengthen and solidify the legal branch of the governmental system, thereby fighting the threat of corruption, pollution, and crime – all factors for which skilled workers also leave their home country. Indeed, advancing the legal system by constantly ensuring its independence, effectiveness, and efficiency is a score on many fronts, including the economic one.
According to the US embassy in Tbilisi, one of the crucial problems the Georgian government and economy face is the potency of the legal system: "There is an increasing lack of confidence in the judicial sector's ability to adjudicate commercial cases independently or in a timely, competent manner, with some business dispute cases languishing in the court system for years. Other companies complain of inefficient decision-making processes at the municipal level, shortcomings in enforcing intellectual property rights, lack of effective anti-trust policies, accusations of political meddling, selective enforcement of laws and regulations, including commercial laws, and difficulties resolving disputes over property rights. The Georgian government continues to work to address these issues, and despite these remaining challenges, Georgia ranks high in the region as a good place to do business." (ICS of Georgia, US Embassy in Tbilisi, 2023).
An alternative approach to the problem is the development of specific industries within the country that will bring prosperity and opportunity for growth and lead to the creation of an advanced economy. To retract to the example of the East-Asian nations, they made it possible for their economies via their unique government approach to establish world-leading industries created by their country's productive innovator workforce, which led to them becoming the World's export-oriented industrialized economies. Indeed, Export-Oriented Industrialization (EOI) significantly affected the issue of Brain Drain in the famous East-Asian economies by making them the new destination for skilled migrant workers from developing economies and even Europe. Thus, there can never be an overall solution to the problem of brain drain unless the state condition of the home country is taken care of both legally and through specific economic orientations that governments must take.
In modern times, and especially in the last 20 years, the case of modern tactics concerning the most optimal solutions to industrializing, either in manufacturing or service-based industries, is heavily debated. Many economists today have outspokenly suggested that the orthodox tactic of EOI is no longer suited for contemporary economies because of barriers like premature deindustrialization that have affected many developing countries in the globalized World. Hence, to solve the issue of Brain Drain, one must tackle the question of the correct governmental economic strategy policymakers must take for their nation's future prosperity.
2.1 Premature Deindustrialization
Nation-states rise and reach prosperity until they don't – most have a similar story of economic progress and later decline or staticism. There isn't a consensus on what formula works best for progress, or at least one so specific that it works every time for all scenarios at different periods. Before the Industrial Revolution, mercantilism was the dominant economic formula for success. The more land and labor one controls, the better the crop yield that year, the greater the tax income for governments, and the more prosperous the nation becomes. Later, the formula changed to which country would export the most and produce more. As capitalism developed throughout the decades, it has shifted to detailed & specific strategies for how an economy would succeed in exporting a good or service. As cited many times throughout the paper, the East Asian nations did this by either offering cheap and highly productive workforce to companies – China, Vietnam, and Philippines – or instilling a benevolent authoritarianism to enhance, aid, and authorize concrete companies' exports in international markets to establish valuable industries essential for global trade and economic prosperity – South Korea, Japan, Taiwan.
Today, many economists like J. E. Stiglitz and Dani Rodrik argue that sufficient and advanced technological advancement in the labor market, like the introduction of Sophisticated control systems and articulated robots, have instituted an inevitable transition from workers to automation for many factories in advanced economies. Today, the highest number of articulated robots concentrated in the World is in advanced economies, where S. Korea leads with an impressive ratio where, in 2020, for every industrial robot per 10K employees: 932. Even low-wage economies like China are looking to invest in automation; this is a sign that even low-wage countries that are export manufacturers are not planning to put workers at work at middle-class wages shortly. Hence, the employment assembled by the exporting manufacturers will be relatively bounded.
Henceforth, rising economies are having a difficult time employing workers. The average % of jobs in manufacturing in developing countries in the 1960s~80s in East Asia that opted to become developed economies had around 40% of jobs in manufacturing, making it conclusive that they would become severe exporters of goods and subsequently reach the advanced economy status. In contemporary times, this is not the case; instead, countries like India, Mexico, South Africa, or Brazil – all countries with high populations and supply of workers – only have around 18% of jobs in manufacturing, consequently skipping the intermediate stage of having many manufacturing jobs, therefore never genuinely sorting out the rise of the middle class. This leads to a minor incentive for governments to invest in human capital and infrastructure. Stiglitz emphasized that "Not all jobs are created equal," underlining the ongoing problem of pre-industrialization for modern rising economies.
The issue of premature deindustrialization is a global one that concerns all developing economies of the modern World. The same is true for Georgia. Policymakers shouldn't disregard focusing on export-oriented industrialization altogether. Firstly, because most of Georgia's GDP is made up of tourism, there is a need to diversify the economy as a whole, which is a critical step to economic progression. Nevertheless, the government of Georgia must implement a modern strategy for its economy's economic prosperity, therefore requiring consideration of the reality of pre-industrialization and opting for a different strategy relevant to the future.
Distinct Sectors/Solutions
1.1 Service Export-Oriented Industrialization – Education
Although many economies today, and much larger ones than the Georgian ones mostly, have tried to ignore the reality of this phenomenon, the decline in these economies is noticeable nonetheless. A solution must be set for an economy to bypass this barrier and plan a modern way of conducting an economy. The Philippines has already mastered a strategy that has made the country far more prosperous and protected from the threat of pre-industrialization than any other economy trying to battle it. It has done so through a service export-oriented economy; starting from the 1980s, the Philippines employment % of jobs in service has increased from 36% in 1980 to around 60% in 2023. The total employment % in service from the whole population is around 57% just in service. Indeed, the majority of the economy is entirely based on service-based exporting, protecting itself from the threat of automation conquering its major field and making it possible for the country's population to be employed in service-based companies.
Such a strategy annihilates the threat of automation replacing a country's labor force. Georgian policymakers could, while also promoting EOI, build up a base for a service-oriented industry that may be exported outside of national borders. Following the idea of the former president of Harvard University, Derek Bok suggested that education is the most prominent investment in a nation within its economy. Wealthy countries such as Australia, the UAE, and Canada have heavily based their economic prosperity or investment on education. Universities are also businesses that try to promote their services to students seeking a good education and a valuable degree. They invest heavily in their professors, campus, and curriculum to make their degrees valuable and increase the demand for their services. The UAE, a country that wasn't, for most of its short history or regional history, a prosperous region, became one only recently. Policymakers sought that the correct move to proceed from the quick enrichment of the economy was to introduce a well-established, protected, and convenient environment for colleges abroad to base their campuses on their territory. This plan came to be a success given that today, one of the leading universities in the US and others have based their campuses on UAE territory for students to apply to, most notably NYU Abu Dhabi, The American University in Dubai (AUD), and the American University of Sharjah.
Although not as prosperous as the UAE with no oil money to enhance its economy, Georgia must still create a platform and environment for globally leading universities to base their colleges in the country. If such a step occurs and highly-ranked universities opt to establish campuses on Georgian soil, many problems, including both Brain Drain and premature industrialization, might be resisted and avoided. Australia's one of the most exported "commodities" is its service in the education field, where it offers students around the World the opportunity to study in Australia for four years, all while aiding the Australian economy. Georgian elected officials must contribute heavily to structuring an environment formally designed for foreign universities to base their campuses on and make Georgia an attractive destination for international and domestic students.
1.2 Service Export-Oriented Industrialization – Financial Sector
For a solid tertiary sector to arise in Georgia, the financial industry must lead it to it. Although the financial sector in Georgia is quite impressive, with two of its leading banks being traded on the London Stock Exchange (TBC Bank and the Bank of Georgia), there is one primary problem that the financial sector has yet to solve. One of the main reasons why investors ignore or avoid investing in the Georgian economy is geopolitics. Investing in Georgia is too high of a risk for major companies to plan significant projects in the country. Due to the Russian occupation of the country, an unstable region where war is surrounding the nation from all sides, civil unrest, and constant political tension, many international companies and banks resist Georgia as a destination for significant investment.
Establishing a leading world bank centering itself in a significant Georgian city will signal to the World that investing in Georgia is a safe and reliable investment. Henceforth, Georgian policymakers, with the help and convincing of their partners abroad, like the EU or the USA, must make an effort to attract the foremost banks of the World, such as JPMorgan Chase, Bank of America, Bank of China, or Deutsche Bank to establish themselves in Georgia. Such a step will promote the upbringing of domestic businesses and the introduction of major foreign companies that will see Georgia as a reliable place to open their stores and services. This, in turn, will attract further investment in the country and build up the economic presence of Georgia in the region, making the country a destination for investors and companies alike to promote and sell their goods & services. In the minds of many Georgian and foreign economists, the most "unique to Georgia" problem the economy faces is its geographically unstable region, which makes it difficult for weighty, long-term plans to ensure that require heavy capital and serious planning.
Introducing key international banks on Georgian soil will also help solve the problem of brain drain and premature industrialization. Those who leave the country hoping to find a better job that pays well and is internationally recognized could be well established in Georgian territory. If establishing internationally ranked banks will attract other companies to inaugurate themselves within Georgia, Georgians leaving the country for better opportunities might choose to stay and work at prestigious institutions within their home country. Subsequently, choosing between leaving the homeland is far more complex, and the percentage of citizens that stay and invest in the domestic economy is increasing. Banking – a fundamental part of the tertiary sector – will be essential for employing people who work in financial services and consulting, something that can, in turn, translate to exporting those services and developing the service export-based industries in the nation overall—another way to battle and ensure safety from pre-industrialization
Deduction
Final thoughts
Georgia, although a newly independent country has a long history and experience in assessing its politics and surviving hostile times and foreign threats. Today, it faces an additional challenge of becoming a developed free-market country. Modern problems require modern solutions and maybe focusing and implementing old strategies to cross this barrier could be a mistake. Nevertheless, the solutions stated before are not the only answers to the problem. Georgia is the bridge between Asia and Europe, and as the Ukraine war urges on and Europe constantly searches for additional roots and suppliers for gas and oil in central Asia and the Middle East, Georgia might play a key role in transporting the goods in an organized manner. Yes, there are probably many more ideas that the country might pursue and that may lead to prosperity but this paper acknowledged the main problems that I believe to be apparent to Georgia and how one should combat them. I must stress again that these are not the only problems or solutions to the economic challenge of this great but small country.
Still, I believe that the fundamentals are still relevant, and investing in higher education and political stability is always the correct approach to forecast interest in investment and capital.
Fundamentally, however, I firmly believe in trying something, whatever that may be. To act and persist with experimenting and implementing is the only real and optimal solution to development and reaching the ultimate goal of national prosperity and growing wealth. To recall the wise words President Franklin Delano Roosevelt said in his speech at Ogthlepo University when advocating for the “New Deal” program in the United States during times of economic depression the world had never encountered: "The country needs and, unless I mistake its temper, the country demands bold, persistent experimentation. It is common sense to take a method and try it: If it fails, admit it frankly and try another. But above all, try something. The millions who are in want will not stand by silently forever while the things to satisfy their needs are within easy reach.”
