Free trade, investment and mobility of people in Black Sea Region: case

of Georgia

Kakha Gogolashvili

GFSIS, 2013

Trade

Trade policy objectives

• Georgia is a small economy with total annual output (2012) around USD 16 billion.

• The share of trade in GDP is high – reaching 62,5%, in larger part due to imports.

• Weak industrial and agricultural output.

• Huge trade deficit USD 5,5 billion, causes, despite of significant inflow of remittances, tensions with the current account (CA).

Trade policy objectives

• The government plans to secure a downward trend in the coming years, reducing the deficit till - 4.1 percent of GDP for 2016.

Year 2010 2011 2012 2013 2014 2015 2016

CA % of GDP

-10.3 -11.7 -10.6 -9.8 --8.3 -6.4 -4.1

Trade regime

• Of the most liberals in the region

• Low tariffs on imported goods, 90% goods enter duty free

• No quantitative restrictions

• No export duties

• No trade monopolies

• Few licenses

Trade Regime • 85% of goods (9500 lines) are duty free.

• Duties for 98% calculate with ad valorem rates,

• Average MFN rate 7.5% (12% max. with exclusion of Tobacco at 30%)

• 130 products (basically alcohol beverages) are subject of specific duties.

– 5% tariff rate applied on 63 lines (mainly cheese products and vegetables)

– 12% applied to 1300 lines of products (basically food and agricultural products).

Exclusions from MFN

• FTA Agreements In force since 1994 with Azerbaijan, Moldova, Ukraine, Uzbekistan, Kazakhstan, Turkmenistan, Russia, Armenia

• FTA with Turkey

• Georgia benefits from GSP scheme

– EU, the USA, Japan, Canada, Switzerland and Norway.

– EU GSP+ grants free access to EU market to more than 7200 goods. Part of sensitive agricultural and processed food products remain subjected to the tariff barriers

DCFTA • FREE MOVEMENT OF GOODS

– Trade in goods, Rules of origin, Customs and trade facilitation, Technical regulations on industrial products, standards and conformity assessment procedures , SPS

• SERVICES AND INVESTMENT – Services, freedom of establishment Capital movement

and payments, Competition, IPR, including Gis

• RULES AND HORIZONTAL MATTERS (including TD) – Public procurement, Trade and sustainable development,

Transparency, Trade defence instruments

• INSTITUTIONAL PROVISIONS, – Dispute settlement/mediation mechanism, Institutional

structures /provisional application

Customs • 2005-2007 changes in the Code

• clear definitions of customs tariffs, classification of goods, determination of origin and customs valuation

• Reduction of proceedings from 15 to 7. Less documentation required

• Suspension of duties (when the decisions pending), customs zones and free warehouses

Latest changes

• one-stop-shop services in CCEZ

• Local clearance procedures

To improve further:

- post clearance audit and control

- Integrated border management

Trade statistics analysis

as we see the export has grown five times and import seven times for the last 10 years, but the export growth rate for last

five years is higher than the one of the import

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Export 461 647 865 936 1,232 1,495 1,134 1,677 2,189 2,377

Import 1,139 1,844 2,488 3,675 5,212 6,302 4,500 5,257 7,058 7,842

Trade partners • 2012 top 10 partners accounted for 66% of

total Georgian trade

• Two regional groupings - CIS (32%) and EU (27%) have been main destination of Georgian imports and exports.

• Azerbaijan is the biggest export destination, but…just cars

• It is also the second biggest import source, but.. Just oil and gas

Trade partners 2012

Georgia’s Export Is not sufficiently diversified in terms of the commodities. 10 main positions constitute 62 percent of exports. There are no signs of real specialization.

Imports

• From the other side Georgia's import is quite diversified, while main 10 positions of import amount just to 36% of total imports. The country gets from the world great majority of consumers and industrial goods, technologies and know-how.

Government • Deep liberalization caused adjustment

problems

• Government did not take any tangible measures to support the adjustment process

– No export promotion schemes

– No action on the labor market

– No innovative policy

– No SME support

What is the driver of Georgian Economy?

• Econometric analysis of quarterly data series 1996-2012 shows:

- While a higher GDP may be spent on more imports, more imports cannot raise GDP

- GDP calculation includes net exports and higher imports reduce GDP, all else being equal

- positive coefficient indicates an outside factor – not trade influencing GDP growth

Coefficient on Exports is not statistically significant for this period (P = 0.613). Two facts suggest that some third factor drove both imports and GDP upward: 1. R2-value of 0.986 is extremely high despite not having controlled for any other factors; 2. while a higher GDP may be spent on more imports, more imports cannot raise GDP. Higher imports reduce GDP, all else being equal. A positive coefficient indicates an outside factor . Similar caveats apply to the GDP vs. trade balance and GDP vs. trade turnover regressions.

Adjusted R Square 0.986

Observations 68

Coefficients Standard Error P-value

Intercept 460003118.5 25940033.42 0.000

Exports - Total 0.125 0.246 0.613

Imports - Total 1.743 0.068 0.000

Foreign Direct Investments

Problems of the past • Dependence on loans and aid from

international financial institutions

• Burden of controlling bodies, partiality of justice, inability to enforce contractual rights

• Technological gap

• Investment gap

• Structural problems on the labor market

• Corruption

Legal environment

• The laws that directly determine investment regime in the country

• International agreements that create additional guarantees

• Special acts regulating or affecting the entrepreneurial activities

Laws having direct effect on FDI

• Tax Code, Customs Code the Civil Code

• Law on Promotion and Guarantee of Investment Activity (1996): Georgia has no restrictions on the capital flow,

has no limits or taxes on the repatriation of gains

• Law on Entrepreneurs (1995): Provides national treatment in establishment and operation of companies for foreign persons

• Bankruptcy Law: needs some improvements

• Law on Courts of General Jurisdiction

• Law on Free Competition, Accounting Law, Securities Market Law

Agreements • WTO somehow influences investment related

climate in Georgia

• Agreements on Promotion and Mutual Protection of Investments (32 countries)

• Special provisions in EU-Georgia PCA (1999), the U.S.-Georgia Bilateral Investment Treaty (1994) guarantee application of national treatment to European and U.S. investors.

• Avoidance of Double Taxation and the Prevention of Fiscal Evasion (42 countries, most of EU Member States)

Laws influencing FDI

• Law on Ownership of Agricultural Land

• The Law on Licenses and Permits (number of licenses were reduced from 1500 to 115)

• Law of Georgia on State Property (2010)

– transfer of state property through: competitive bidding; auction; lease-redemption; direct sale; transfer the right of management of state-owned stocks.

– Allows privatization of railways, ports, pipelines, institutes and so, on and contains much shorter list of the restricted positions

Laws influencing FDI financial sector

• Law on Commercial Banks – establishes equal treatment for operation of representations of

foreign banks and Georgian banks

– Establishment of Foreign Banks needs provision of more docs and is subject of consultations between national banks.

– There are more than 120 foreign branches in Georgia

• The Law of Georgia on Insurance Activity – Foreign persons can found organization or branch

– Foreign Companies can not act directly

–

The Laws influencing FDI extractive industries

• Law on Concessions

• the Law on Deposits

• Law on Oil and Gas

• 2011 Law of Georgia On the Procedure for Granting Concessions to Foreign Countries and Companies – protection of rights and security guarantees

– right of the concessionaire to manage its own products and profits after paying all dues and taxes

– defends form the illegal abuse of state organs

– there is no list of objects allowed for the concessions and there is no special register for concessions

The Laws influencing FDI • Civil Code and the Law on Patents and

Trademarks – weak implementation. Ex-officio powers, courts, customs

• Tax code – only 6 types of taxes. Low tax rates

• Competition Law – was practically not existing. Has been adopted in 2012

• Labor Code – was considered as one of the most free in the world. Is

being changed in direction of higher protection of the rights of employees. The impact on FDI not yet known. Matter of “bad” and “good” investments

Institutional measures • Efforts to create favorable climate for foreign investors.

• Absence of any restriction or burden on the liquidation and repatriation of investments and profits, low taxes,

• Equal treatment of foreign and domestic investors,

• Easy business registration.

• Georgian Investment Agency (one-stop-shop)

• Free Industrial (FTZ) and Touristic Zones (TZ)

• The government considers to exempt the businesses in the mentioned zones with the profit taxes,

• Establishment of the Partnership Fund (attraction of FDI through PPP projects).

• The so called “one billion worth” Agricultural fund

FDI and growth • Important driver of growth (consensus among

economists)

• Absorptive capacity influences acquiring (through investments) the technology, know-how needed for sustainable growth

• Possible channels: well-developed domestic financial markets, institutional quality and human capital

Importance of FDI • During last 10 years FDI’s share in the gross

capital formation in the country fluctuates between 30-60%.

• makes considerable contribution to the GDP growth

• Strengthens capital account, supports the balance of payment with 20% CA deficit

Two heights periods of FDI in Georgia First – BTC and BTE construction Second – Reforms: deregulation, anticorruption, increased safety and security, intensive privatization of state own assets

FDI dynamics since 2005 in four major emerging markets

Share of Reinvestments in total FDI Long term project based investments remained staying in the country, while speculative capital leaves the country (our explanation)

2006 2007 2008 2009 2010 2011 2012

Reinvestments (%) in total FDA

5.4 2.4 4.9 -8.4 28.1 30.0 12.8

Good Trend • Kamal A. El-Wassal (2008) results of 10 years long

study in Arab countries: “investment incentives should focus not only on FDI “quantity” but also on FDI “quality”…primary focus of domestic policy solutions…to direct FDI inflows to dynamic sectors that have a high potential for beneficial spillovers for growth, such as the manufacturing sector…”

• According to the GEOSTAT since 2007 the transport, energy and manufacturing were respectively most “invested” sectors in Georgia. In 2012 manufacturing sector became the major recipient of foreign direct investments.