Companies’ lack of interest in DCFTA trade may slow benefits

Positive expectations abound in Georgia around the potential impact of the Deep and Comprehensive Free Trade Area (DCFTA) Agreement with the EU. Yet, it is still unclear if the agreement’s trade-related components have increased trade. According to CRRC-Georgia’s Tax Perceptions Survey conducted from September to November 2015 for USAID’s Governing for Growth (G4G) project, only 6% of surveyed companies traded with the EU under the DCFTA Agreement. Moreover, according to the same survey, most Georgian companies report not being interested in trading in the DCFTA. This is a troubling finding, since, by law, all Georgian companies will eventually have to comply with DCFTA standards whether they export or not. That is to say, even if companies are not interested in exporting to the EU, the standards of their products will still need to increase. This will benefit consumers in the long run, but may hurt companies in the short term during the period of approximation of Georgian legislation with the EU’s.

When looking at the difference in absolute value of exports from Georgia to the EU one year before the agreement entered into force (September 2013 to August 2014) and the year after (September 2014 to August 2015), we see that it fell by 10% in US dollars, while the value of imports from the EU increased by 2% in USD. While the devaluation of the lari could be one explanation why the value fell, there was still a 7% drop in exports valued in lari. This decrease in exports is unexpected, given that DCFTA removed almost all tariffs between the EU and Georgia.

This change can be partially explained by the value of exports fluctuating from year to year.  The value of exports was particularly high during the period of September 2013 to August 2014, 61% higher in respect to the preceding 12-month period.

In addition to the absolute value of exports to the EU declining after the implementation of the DCFTA, the share of Georgia’s exports heading to the EU has not increased substantially either. Between September 2012 and August 2013, 17% of Georgia’s exports went to the EU. In the subsequent 12-month period, the respective share was 25%, and increased to just 26% in the year following DCFTA’s implementation in September 2014. That is to say, following DCFTA, the share of Georgian exports going to the EU increased by only one percentage point.

The EU is an important trade partner for Georgia, and the DCFTA should lead to increased trade between the EU and Georgia over time. However, it appears that it is yet to bear fruit in terms of exports to the EU. One factor that may be contributing to this is that, to a certain extent, the Government of Georgia has taken an "if we build it, they will come" approach to the implementation of the DCFTA. While the Ministry of Economy and Sustainable Development of Georgia provides information to companies that want to export, there are few tailored forms of promotion outside general awareness-raising. This may explain why CRRC survey findings show that a majority of companies, even many of those involved in external trade, report to be uninterested in the DCFTA.

The Tax Perceptions Survey showed that 90% of surveyed companies do not trade under the DCFTA regime. Of these companies, 69% said it was because they were not interested, 11% because they did not know about it, and 8% because they could not satisfy the terms.

It makes sense that not every company would trade under the DCFTA agreement - a corner shop, for example, is unlikely to have a product to export after all. However, companies that export also expressed disinterest. Seventy percent of these companies reported they do not take advantage of the DCFTA and almost half (46%) reported they were not interested in it.

This lack of interest is a clear issue. The DCFTA Agreement will eventually require the approximation of Georgian legislation with the EU’s, and the vast majority of companies will need to comply with the terms of the agreement. Although this will result in improved quality of many products on the Georgian market, it will also create additional costs for businesses. Without greater interest in exporting, these costs will not be offset by the increased trade, potentially bringing pain upon the local economy.

The survey didn’t ask about why companies are not interested in the DCFTA. Hence, further research should be done to gather comprehensive information on the issue. In the meantime, the EU and the Government of Georgia should be alert to the fact that targeted outreach is needed to encourage companies to meet DCFTA requirements and provide support to make this process as painless as possible. Outreach should also target exporters to explain to them how they can benefit from the DCFTA.

Attitudes towards Europeans and Americans among Georgian Youth

On November 29, Georgia initialed an Association Agreement with the European Union at the EU-Eastern Partnership Summit in Vilnius, Latvia. This represents a step toward closer economic integration of Georgia into the EU. According to CRRC’s 2012 Caucasus Barometer (CB), 72% of Georgians fully or rather support Georgia’s membership to the EU, and 67% of Georgians fully or rather support membership in NATO. This would imply that Georgians have generally positive attitudes towards a political and security-based relationship with the West (i.e. EU and the United States). In addition, 59% of Georgians (especially those between 18-35 years old) agree with the statement, “I am Georgian, and therefore I am European.” Using data from the CB 2012, this blog shows that positive attitudes towards Americans and certain Europeans, such as the English and Greeks, are higher among Georgian youth.
Overall, Georgians have positive attitudes towards doing business with Americans, the English and Greeks. 79% of Georgians approve of doing business with Americans. 77% feel the same with respect to the English and 75% with Greeks. When split by age groups, approval is highest among Georgians 18-35 years old for all three nationalities. For example, doing business with Greeks has 80% approval among 18-35 year olds, 76% among 36-55 year olds, and 70% for those 56+. Approval for doing business with Americans and English follows a relatively similar trend.

Socially, approval of Georgian women marrying foreign men is relatively low (36% for Americans, 36% for the English and 35% for Greeks). However, younger Georgians are slightly more open to Georgian women marrying within these groups, than Georgians 56 years and older.

When it comes to politics, young Georgians are also more trusting of the EU, which is not surprising since 67% of Georgians between 18-35 years old see themselves as European. A caveat in these responses is that 12% of Georgians believe that Georgia is currently a member of the EU, including 17% of those aged 18-35 years old (CRRC EU Survey 2011, Georgia).

In line with their greater trust of the EU and approval of doing business with Americans, slightly more young Georgians believe that the United States is the biggest friend of Georgia, than older Georgians. In contrast, 41% of young Georgians (18-35 years old) believe that Russia is the biggest enemy of Georgia, whereas 32% of all Georgians 36 and older agree.

Younger Georgians, 18-35 years old, appear to show slightly higher approval of cooperation with the West on these specific questions. The same trends of approval exist with respect to knowledge of English and personal income. That is, in Georgia, higher levels of education, knowledge of English, and personal income are related to higher rates of approval for certain Europeans such as English and Greeks, and Americans with respect to the economic, social, and political aspects discussed above.

At the crossroads of Europe and Eurasia - exploring public attitudes in the South Caucasus

Armenia's announcement in September that it would enter the Eurasian Customs Union led to some dissatisfaction regarding relations with Russia, especially since the announcement came months before the Armenian delegation’s visit to Vilnius to sign a DCFTA (Deep and Comprehensive Free Trade Agreement) with the EU. At the first public debate on the issue in Armenia, organised by the Konrad Adenauer Stiftung and Regional Studies Center, speakers addressed possible attitudes of Azerbaijan and Georgia to the Customs Union. The director of the Caucasus Institute, Dr. Alexander Iskandaryan, noted that Azerbaijan, with its significant energy resources and ability to export them to the EU, does not need to join the organisation for economic development. However, according to him Azerbaijan would not be able to sign a DCFTA given that the country is not a member of the WTO—a prerequisite for all signatories of the document. Georgian Prime Minister Ivanishvili has remained sceptical about the Customs Union, but has not ruled out some form of Georgian participation. While all three South Caucasian countries attempt to diversify their trade (particularly with the EU and Turkey), Russia remains a very important trading partner. Russian firms own critical assets in the Armenian telecommunications, transport, and energy sectors. Data from the Caucasus Barometer (CB) show largely positive attitudes towards conducting business with Russians – not only in Armenia, but in all three countries. In light of the ongoing debate in Armenia on the significance of joining the Customs Union, the CB's results are worth considering within the wider South Caucasian context.

Armenia has shown the most positive attitudes towards business with Russians from 2009 to 2012, but negative attitudes have slightly increased. The result for 2012 shows an approval rating of 84%, lower than the past four years, yet higher than any result in Azerbaijan during the same time period, and higher than results in Georgia for the prior 3 years.

Azerbaijanis’ approval of doing business with Russians has increased over time, and have shown the biggest change from negative to positive attitudes over the four years shown. The share of those who approve of doing business with Russians has increased from 62% in 2009 to 82% in 2012.

Georgians have continued to have positive attitudes about doing business with Russians over time. Even in 2009, one year after the Russian-Georgian War in 2008, 76% approved doing business with Russians.

There are several possible reasons for these positive attitudes in addition to intensive trade with Russia and strong social networks with Russians. According to an infographic from the World Bank in 2013, 4 of the top 10 countries receiving remittances by share of GDP are in the CIS (Armenia taking sixth place with 21%). Russia is the top destination for migrant workers across the Former Soviet Union, and it is the destination of choice for 61% of Armenia's potential emigrants. Considering that the amount of private remittances from Russia to Armenia in the first half of 2013 increased by 113%, Armenians' positive attitudes may not be surprising. The net amount of remittances sent from Russia to Azerbaijan in 2013 has been 234 million USD thus far, and 263 million USD to Armenia—remittances from abroad were less significant than in Armenia as a share of GDP. During a recent conference in Yerevan on demography, Dr. Alexander Grigorian noted that access to Russia for Armenian migrant labourers could become even easier following Armenia's accession to the Customs Union, and that this possibly lead to  quantitative (higher numbers of migrant labourers) and qualitative (a higher percentage of educated workers) changes in emigration from the country.

What other factors do you think could play a part in attitudes towards doing business with Russians?

If you want to explore these questions in more detail for yourself, we welcome you to download the 2012 and other Caucasus Barometer datasets.

The French Senate Bill and Armenian Perceptions on Turkey

As the New York Times reports, on January 23, 2012 the French Senate “approved a bill […] criminalizing the denial of officially recognized genocides, including the Armenian genocide begun in 1915.” The bill has fanned tensions between Turkey and France, emphasizing the complexities of politics and perceptions. Turkish immigrants and French citizens of Turkish origin in Paris, as well as Turks in Ankara and in Istanbul have protested against the bill. Publicity has emphasized Turkey’s objections to the bill as well as the country’s perspective on the events of 1915.

Less attention has been given to the country and population of Armenia itself, leaving many questions unanswered. What does this mean for the future of Armenia-Turkey relations, as well as popular perceptions in these countries? And what are these perceptions to start out with? The 2010 CB asked Armenians how they think the population of Turkey perceives both the country of Armenia and its population. These set of questions were exclusively asked in Armenia and pertain to the population and country of Armenia, rather than the perceptions of Armenians throughout the world or in Turkey. When asked, “Please tell me, in your opinion, how negative or how positive is the population of Turkey's general attitude towards Armenians?” 62% of Armenians felt Turkey’s population had a negative attitude towards Armenians. 17% of Armenians felt Turkey’s population had a generally positive attitude towards Armenians.

Similarly, people were asked, “In your opinion, how negative or how positive is the population of Turkey's general attitude towards the country of Armenia?” More than half of the population (69%) of Armenia felt that Turkey’s population had a negative attitude towards Armenia and 9% thought Turkey’s population had a positive view of Armenia.

Recent politics has highlighted the historical events, while perceptions guide interactions. However, the data has shown that in some instances economic factors overshadow politics and perceptions. This is emphasized by 2010 CB data that shows a willingness on the part of Armenians to conduct business with Turks despite what they perceive to be Turkish discontent towards Armenians and Armenia. In response to the question, ‘Would you approve or disapprove of people of your ethnicity doing business with Turks?’ 45% of Armenians said they approved of conducting business with Turks while 53% said they did not approve.

The data indicates more negative perceptions of Turkish attitudes towards Armenia and Armenians than positive. Yet, almost half of the adult population of Armenia is willing to conduct business with Turks. This could prove to be a mediating factor between the two countries. The economic benefits of trade with Turkey as perceived by Armenians are presented in a previous blog, “Armenian attitudes towards opening the border with Turkey”. But what impact will the new bill have on the future of political, social and economic relationships between Turkey and Armenia? Will it alter Armenian-Turkish public perceptions?

Caucasus Barometer 2010 reveals Georgian attitudes towards Indians

A recent article in Georgia Today entitled “India through the eyes of Georgian children” described an exhibition, which was hosted by Bharatma, a Georgian-Indian cultural organization established 20 years ago, in which young Georgian public school students displayed artwork portraying their visions of Indian culture. This organization receives funding from the Indian Embassy to Armenia and Georgia (located in Yerevan) and seeks to foster mutual Georgian-Indian understanding. The exhibition sparks further interest in Georgians' perceptions not only of distant, far-away India, but also on the growing minority of Indians in Tbilisi.

The website for the Indian Embassy to Armenia and Georgia draws historical links between Georgia and India in a cursory summary of India-Georgia bilateral relations. This overview alludes to ties in literature and trade, as well as centuries-old connections dating back to the Mughal era during which Georgians were believed not only to have occupied rather high positions in the Courts but also to have married into the Mughal imperial family.

Currently, a number of Indians reside in Tbilisi as students at Tbilisi State Medical University as well as professionals working for Indian companies with office locations in Georgia. Although, there seem to be both historical and current close ties between Georgians and Indians, it would be interesting to explore specific attitudes of Georgians towards Indians. The recent 2010 Caucasus Barometer included two questions that provide some fascinating insights on Georgians’ approval on doing business with Indians and on Georgian women marrying Indians.

This first figure reveals some interesting findings, particularly that Georgians approve doing business with Ukrainians more than with other groups selected for comparison. While Georgians’ approval of doing business with Indians (60%) does not fare particularly well, it is also, rather strikingly, comparatively not that bad, with just 4% lower than Armenians. Perhaps these figures could reflect some historical ties or a familiarity with Indian culture through exposure to Bollywood films. That the approval percentage is not even higher for Indians could feasibly be a function of a variety of factors, including xenophobia and the fear of foreigners taking Georgians’ jobs.

The figure below presents a much more differentiated, stark picture. In this case, it is evident that a relatively low percentage of Georgians approve of Georgian women marrying Indians. However, data shows that Turks do not garner more approval, nor do the Chinese, who receive even less approval. There are many forces that could conceivably be at play here. For example, religion could be a major factor influencing approval rates, as could a common Soviet history. Geography could also be a viable explanation, as Georgians outside of Tbilisi or urban settlements might not have any interaction with local Indian and Chinese populations. This could potentially render them more foreign to Georgians. Then again, increased interaction might not necessarily be associated with higher approval ratings on doing business or Georgian women marrying Indians.

Understanding any effects of a burgeoning Indian community on Georgians’ approval for doing business or Georgian women marrying Indians would necessitate some kind of analysis over time. Without such, it is difficult to make any firm conclusions. However, upon first glance, this data shows some interesting overall, general attitudes. What could be some other speculations based on this data? We welcome your thoughts!

Insight to Georgian Households | CRRC Data on Economic Wellbeing in the Caucasus

How are Georgians doing financially, how much do they earn and what do they spend on? CRRC’s Data Initiative allows for an in-depth analysis of these and similar issues on the economic status of the population across the South Caucasus.

We again (see our recent piece on social developments here) published something in Investor.ge, the journal published by the American Chamber of Commerce -- and a great resource for tracking business and economic developments.

In this article, Arpine and Nana discuss how much Georgians earn, what they spend money on, how they borrow, and how they see their financial future. Read the article on economic well-being of Georgian households here.

Georgian Media as Business | Data Snapshots

In terms of the business findings, CRRC's Media Survey (undertaken in September/October 2009) generated extensive data that is available to help media make good business decisions. One recent presentation, summarized here, focused on showing the diversity of data that is available. 

Internet clearly will influence the media environment, with 19 percent saying that they have access to the Internet. When browsing the Internet, social networking sites are most popular (59 percent), followed by doing emails (36 percent) and then listening to music and watching movies (34 percent). For those that do not have Internet access at home, 36 percent say that the main reason is that it is too expensive. Twenty percent say that the problem is that they do not have access in their area. Only 7 percent say they do not want to use it. While price is the main reason for not getting Internet, 49 percent also say they do not know how much Internet costs in their settlement. (Details on how much different groups would be willing to pay is also available.) 

Yet a significant challenge, little discussed, is that free-download sites (ranked among the top ten sites in Georgia) may get the public to form the expectation that content is always for free. This expectation is a very significant risk to the media business in Georgia which needs to convince the public to pay for quality content. Intellectual property concerns, while not on the agenda right now, will soon become relevant.

While newspapers have limited circulation, not all of it is a matter of cost. Only 21 percent say that they don't read newspapers because they are too expensive. Twenty-three percent say they currently are not interested in reading newspapers, and 22 percent that newspapers simply are not sold in their area, implying that there are some potential customers that could still be won over. Again, the prices that different groups would be willing to pay are also available.

As for television, consumers clearly say they want quality coverage, delivered professionally. This seems important in attracting and retaining viewers. However, television is used in different ways by different groups. When switching on TV, the majority of men (65 percent) actually watch, while the majority of women (59 percent) use it as a kind of radio, running the TV while engaging in other tasks. Current TV advertising does not seem to popular, with almost 80percent saying that they usually switch channels if there's a long block of advertising.

These are only some data points, and that much more targeted data can be made available if media professionals or researchers are interested in finding out what the audience wants. 

[This research has been produced with the assistance of the European Union. The contents of this publication are the sole responsibility of the CRRC and can be in no way taken as to reflect the views of the European Union.]

Financial crisis in Armenia | EV research center’s assessment

The global financial crisis has affected 70% of Armenians, states the Economy and Values Research Center, which recently conducted a study of the impact of the financial crisis in Armenia. The study included a survey of 1000 households in all the regions of Armenia and a survey of 60 large- and medium-sized businesses.

The financial crisis has had an impact across Armenia. The report indicates an 11-25% decrease in income throughout the country. The largest decrease in income is observed in Yerevan, where 40% of the respondents report that their income has dropped by 26-50%.

The crisis has also impacted consumer preferences. Thus, 80% of households will start purchasing cheaper goods. Additionally, 30% of households plan to cut or postpone their spending on communications, durable goods and vacation.

The impact of the crisis on the business sector is significant. According to the study 90% of the businesses surveyed reported that they have been affected by the crisis, and only 5% think that it will not influence them. Moreover, businesses are pessimistic in their predictions, with 80% of the surveyed businesses thinking that the situation will deteriorate further in 2009.

Strategies to overcome the crisis likely mirror those of businesses in other countries. The majority of the businesses surveyed plan to cut administrative expenses and postpone investments. Forty percent, particularly small- and medium-sized businesses, plan to downsize.

The results of the study are available here (in Armenian only).

Heritage Foundation | Index of Economic Freedom 2008

(We today noticed that we forgot to post this earlier -- apologies!)

The Heritage Foundation provides visitors with the 2008 Index of Economic Freedom, which covers 162 countries across 10 specific freedoms such as trade freedom, business freedom, investment freedom, and property rights. The 2008 Index provides an even clearer picture of economic freedom by using data-driven equations which allows countries to be graded between scores of 0 and 100.

According to the 2008 assessment, Azerbaijan’s economy is 55.3% free, which makes it 107^th in the world. If we look at the distribution, Azerbaijan falls into Mostly Unfree category.

Azerbaijan has considerable challenges in Investment Freedom, Financial Freedom, Property Rights and Freedom from Corruption. Its overall score is insignificantly different (0.5% points) than the last year. Azerbaijan is ranked 18^th out of 30 countries in the Asia-Pacific region, and its overall score is below the world average.

For more info on Azerbaijan, click _here.

Georgia is in a much better situation than Azerbaijan, having a 69.2% free economy, which makes it the world’s 32^nd freest economy. Its overall score is 0.1% point lower than last year. Similar to Azerbaijan, two categories remain significantly below the world average: Property Rights and Freedom from Corruption. Property Rights may reflect the 2006 and 2007 situation, in which old (illegally, as the government alleged) privatizations were rescinded. As for corruption, is the data really plausible? According to the CRRC Data Initiative (DI) 2007, only 1% of the respondents in Georgia say they had to pay a bribe in the previous year.

Moreover, Georgia is ranked 18^th out of 41 counties in the European Region, and its overall score is equal to the regional average. For more info on Georgia, click here.

From the South Caucasus countries Armenia has the best score. It ranks 28^th with 70.3% freedom, just narrowly beating Georgia.

But Armenia, like Georgia, scores way below the world average in Property rights and Freedom from Corruption categories. In Georgia's case, we are not convinced by the accuracy of the score on Freedom from Corruption. Note a further post on this issue, for more detail.

To view scores and rankings for any country, or to find out which are the top ten countries, along with detailed data and background analysis, click here.

Cell Phone Data | Figures for the South Caucasus

Cell phones seem to have become indispensable in the West. The number of cell phones in the UK, for instance, has already exceeded the number of its people. Throughout the world, the total amount of cell phone owners increases every year.

So how does this trend look in the South Caucasus? It appears that more than half the adult population across the three countries already owns a mobile phone. Furthermore, the South Caucasus is one of the top growing global regions for usage of mobile phones since the percentage of cell phone users has grown faster than in the nominally largest growing markets of Brazil, Russia, India and China (the BRIC countries).

The CRRC Data Initiative (DI) indicates that the number of mobile phones per household in Azerbaijan reached 76 % in 2007, the highest percentage in the region. Armenia followed up on second place with 70 % cell phones per household and Georgia came on third place with 61 %.
As for the distribution across the country, there are (predictably) more phones in the capitals than in the countryside, as shown below in the chart.

However, recent growth has been particularly pronounced in rural areas. This has decreased the cell phone ownership gap between rural and urban areas. For example, rural Azerbaijan went from having cell phones in 32 % of households in 2006 to 64 % in 2007, a doubling of numbers in a single year. Rural Armenia increased from 47 % in 2006 to 66 % in 2007, an increase of nearly 20 % in a year, and rural Georgia reached the 50 % level in 2007 from having had 38 % the previous year, which still is a 12 % increase.

Although you could do the maths, CRRC household data does not provide direct figures on the total number of cell phones. This statistic is offered by the International Telecommunication Union (click on “Statistics”). With slightly older data, it shows Armenia as the country with the highest density of cell phones in the South Caucasus with 62,5 cell phones per 100 inhabitants (41,8 in 2006). Georgia follows up on second place with 59,1 cell phones per 100 inhabitants (38,4 in 2006) followed by Azerbaijan with 53,3 cell phones per 100 inhabitants (39,2 in 2006). Their data is based on an annual questionnaire sent to government agencies responsible for telecommunication. Caveat emptor (it may, for example, include inactive phones). It might be interesting to reconcile the numbers from various sources.

For a refreshing anthropological view on mobile phone usage in developing countries, in the New Scientist, click here.

Want to investigate this topic further? Check out our datasets!

How Supply fails Demand | Pots of Honey

So what plagues local business? In many cases it's the same problem we have in politics as well: there simply is the wrong paradigm. It is self-centered, rather than being other-centered. Or, if that sounds too much like marriage counseling, let's put it this way: too many sellers try to solve their own problems, rather than those of other people. Nothing wrong with that, but it's not how you can succeed in a market. After all, who likes to spend their money on other people's problems? Charity is not a business model, at least not in retail.

Now in the last few days, an email exchange that perfectly illustrates this problem. (Note: I changed names, and the person is not even local. But it demonstrates the perennial problem.)

----------------------------------------
Dear all,

Many of you have purchased honey produced by my in-laws out close to Bakuriani. This year we have a bumper harvest and I can honestly say that the honey is even more delicious than ever. Its great with tea or over hot cereal and is especially effective at warding off colds. Most of the honey sold in the bazroba is adulterated with sugar water, but the one we offer is all natural. Price is 15 GEL per liter [around 10 USD], different sizes can be arranged.

Please contact me off list or call XYZ at 877-1234567 to arrange delivery.

Cheers,
Anna

-------------------------------------
From: Hans Gutbrod
Subject: Re: honey for sale
To: Anna
Date: Saturday, October 4, 2008, 12:19 PM

Hi Anna,

I really liked the honey, but I think you'd market it more effectively if you sell it in small doses. The 1.5 Litre pot that I bought last year (or even the year before?) is still sitting in my apartment, and I am still scraping it...

I think if you sell it in 250g jars, maybe with a small cute label, for 6 GEL, with 1 GEL going towards the charity your husband runs, you'd have even more uptake.

Anyway, I'd happily take 4 jars of 250 g each, and would pay extra for the jars.

Best,
Hans

-------- Original Message --------

Subject: Re: honey for sale
Date: Sun, 5 Oct 2008 12:21:00 -0700 (PDT)
To: Hans Gutbrod

Hi Hans,

I've sold small jars in the past at the Christmas bazaar, but it's really not worth our time, not to mention the mess. We have 2 tons of honey this year! If you'd like 2 half-liter jars, I can do that.

Cheers,
Anna

--------------------------------------------

So effectily Anna (not her real name) is trying to solve her problem of 2 tons, rather than my problem of how to consume that honey.

Pooh the Bear would be impressed.

Note the maths: 4 x 250g @ 6 GEL = 24 GEL; subtract additional cost for label and jars, and you still could make more than 20 GEL, an extra 5 GEL on the 15 GEL per liter. And that price is realistic, since the market that Anna is advertising to is NOT price sensitive, merely focusing on quality and convenience.

At least as important, Anna is cutting herself off from a natural extra market: honey as a nice gift in and from Georgia. A small, well-labelled glass of honey works well, it's a present that anyone would like to give and receive. Conversely, who will schlepp 1 liter pots anywhere?

These giant pots of honey to me are emblematic of why supply so often fails to meet demand. Sweetness undesired, at least in that shape and form. No wonder, then, that you still have so much foreign honey lining local super-market shelves. I sometimes even wonder whether these little stories and lessons are not at least as important in characterizing the business malaise than the larger economic explanations.

Any other instances you have come across? Any suggestions for how we could measure this phenomenon?

The August Conflict | Economic Impact on Georgia?

Tbilisi radar, destroyed by a Russian missile

In Georgia, attention now turns towards sorting out the impact of the short August conflict. How plausible is the reporting we are seeing? Do the journalists get it right?

Here's one account by the New York Times, outlining some of the damage and the upcoming challenges.


Click here for the complete article (access is free, but it will require you to register; we can make the article available to you directly as well).

Posted on an e-mail newsgroup focusing on Georgia, this NYT article quickly drew a response. Here is what (Dr.) George Welton, a consultant we have worked with extensively and who has done various research projects in Georgia, had to say:

-----------------------
"This is sufficiently fishy to warrant comment. First, ‘Caucasian Tiger’ gimme a break. As far as I could tell before the war the economy was vastly overheating with an inflated property market and a banking sector expanding way too fast (is there any other city in the world with this many ATMs?) But more importantly, Georgia was still not really producing anything that the world wanted to buy. Two of its largest exports – manganese and copper – have increased their revenues dramatically largely because of the price of resources going up on world markets and agriculture has still not recovered from the Russian market closing (wine is now exporting at about 40% its pre-ban levels – not allowing for inflation). But now everything wrong with the Georgian economy is going to be blamed on the war.

That said, I think that the war damage melodrama is vastly unhelpful.

1/ I don’t really buy this claim of $50 million repair costs for Caucasus Online. Can anyone verify this happened? I know people who were emailing, texting and skyping throughout the war – and there are lots of reasons why a business might want to exaggerate its losses. I have a feeling a lot of Georgian businesses might find they had things hit by the Russians in coming weeks.

2/ The tourist season has been damaged but ‘Russian tourists?!’. The Armenian tourists (who have to be the vast majority of the Georgian tourist market) will be back next year.

3/ There is no evidence that the fire outside of Borjomi National Park was started with incendiary bombs. The 950 hectares (just under 10 square kilometres) was almost entirely outside the park (the revised Gvt figures put 150 hectares in the park) and even if it had all been in the park, this is only slightly more than 1%. Borjomi did not ‘burn’.

4/ The idea that the Russians targeted infrastructure or that they might in the future is completely unsupported by the evidence. One train bridge (right next to another train bridge which almost immediately replaced it) was destroyed. None of the key infrastructure (Inguri dam, the BTC pipeline, the ports etc) were damaged significantly.

5/ The banking system survived without banks closing their doors for a significant time and in spite of the fact that there was a war. This is remarkable and while I am sure it will continue to need support, I think this should be seen as a sign of the strength of the Georgian economy, not its weakness.

6/ One billion infrastructure losses?!? – I guess he must be talking about the military (which still seems a little implausible)

The reason why this matters is that where the article is right is that the key damage to this country is investor confidence. Foreign aid might get the Georgian budget through the next two years or so – but after that if investors don’t start to come back then the country is really in trouble. And talking about the horrendous damage and huge risks that Russia poses to the country are not going to help that confidence return.

----------------

So far George Welton's comments. Any views?

Doing business in Azerbaijan: easy in theory

Results of the World Bank’s Doing Business 2009 project, claims to present "objective measures of business regulations and their enforcement across 181 economies and selected cities at the sub-national and regional level", were made public today.

According to the report, Azerbaijan made the biggest progress in reforming business regulations among all surveyed countries and rose from last year’s 96th place to the 33rd in 2008. Azerbaijan came ahead of most CIS countries, excluding Georgia with its 15th rank in the report.
The Bank ranks countries according to the following 10 sets of indicators: starting a business, dealing with construction permits, employing workers, registering property, getting credit, protecting investors, paying taxes, trading across borders, enforcing contracts, and closing a business.

Azerbaijan has improved its ranking in all of these indicators, with the exception of closing a business. The biggest positive changes were achieved in protecting investors, registering property, starting a business, and employing workers through several steps such as substantial amendments to the labor code simplifying hiring and dismissal, creation of a second commercial court in Baku, a new unified property registry, and a one-stop shop for company registration.

Local experts do not agree with the overly optimistic results of the report. Just yesterday the Entrepreneurship Development Foundation, a local NGO, presented results of a survey conducted among businessmen in Baku and regions in May-July 2008. According to the survey, that included 41 questions on entrepreneurship, about 52% of small entrepreneurs in Azerbaijan consider it impossible to conduct business without violating laws and regulations. Sabit Bagirov, the chairman of the Foundation, added that the fear of being persecuted led to a quite high non-response rate.

Another local economic expert, Gubad Ibadoglu, told Radio Liberty that since the World Bank partners mainly with the Government, the ranking resulted from long and intensive negotiations between the Government and the Bank officials.

The Doing Business methodology relies on surveys among “local experts, including lawyers, business consultants, accountants, freight forwarders, government officials and other professionals routinely administering or advising on legal and regulatory requirements”. As noted by a 2008 independent evaluation of the Doing Business project (available here) , the report is based on the assumption that improved regulatory environment leads to the improved firm performance and economic outcomes. It does not capture how the regulations are actually applied, or whether they work in the reality. Among other things, the evaluation recommended to expand the informant base and to make the selection of informants more transparent.

Beyond a doubt, the report succeeded in influencing policy makers and giving an impulse to a number of policy changes in Azerbaijan, but one must use caution when interpreting its rankings.

Tourism: Structure and Cost-sharing

A slightly specialized topic: what's the cost of tourism? Often suggested as a way of developing parts of the South Caucasus, especially Georgia, quickly, it's interesting to take a quick look, since in tourism many factors interact: business, environment, architecture, urban planning, societal habits, local versus national government, local and foreign expectations, and the challenge of reconciling all of those.

Gudauri, Georgia's main ski resort is an interesting example. It currently is being privatized again, after a previous privatization attempt did not succeed when the investor walked away after a few months, for a range of reasons, including local (they found it difficult to get all the land they needed to consolidate their holdings) and legal (apparently they were sued in a foreign court for a debt incurred by the Shevardnadze government, under an obscure clause).


In Gudauri the lifts are bundled together with the main Sport Hotel, as a single entity, a curious late 80s Austrian-Soviet venture. The bundling creates various problems: investments into the lifts may benefit all hotels and guest houses by bringing more visitors, but investment has to be undertaken by a single institution. The other hotels effectively are free riders.

This also raises issues at the end of season: now the lifts are beginning to run at a loss, with daily electricity costs about 600 GEL, and personnel costs of about 400 GEL, plus fuel costs for grading the pistes, starting anywhere at 300 GEL per day, depending on the weather. At a price per pass of 25 GEL, more than 60 skiers are needed in the resort, and as last weekend showed, it's barely more than three dozen at this time of year.

But: at this time of year, lifts start at nine o'clock (as opposed to ten, earlier in the season) and many people prefer to ski early before it gets too slushy, so that people now are even more likely to stay over, rather than drive up from Tbilisi. A few guest houses are actually full, and thriving. Of course, that money would dry up once the season is over, so the skiing is primarily kept to feed the guesthouses. Yet in the current structure, the lift operator still incurs a loss.

Generally, quality of service has seen a huge improvement in the last year, and the main variable is competent new management. But a lot of things still need to fall into place, and in the upcoming privatization one idea is to separate the lifts out, which may even be an option since this year for the first time the llifts have been making a profit.

In a way, the resort mirrors many of the intervowen challenges that need to be met (and who to meet them: national government? Local?), and in which growth typically throws up the next problem, such as the supply of drinking water to all the new buildings.