The importance of industry to the Georgian Economy

Heavy manufacturing industry in Georgia is one of the most important sectors in terms of value added, exports and employment. It is also one of the few areas where there are large companies with immediate opportunity for dramatic expansion. Growth in this sector, therefore, offers huge potential for providing broad economic growth, reducing unemployment, increasing tax receipts and improving Georgia’s balance of payments situation.

Discussions of economic development in Georgia, particularly since 2004, have focused on tourism, energy and (recently) agriculture, with a range of other sectors like transport and logistics, finance, food-processing and textiles gaining partial consideration depending upon where the discussion is taking place.

However, manufacturing industry dwarfs most other sectors. In 2013 it was worth 11% of GDP, and made up approximately 16% of formal employment and around 30% of exports. Only the “trade” (mostly small retail shops) sector was larger.

Source: Geostat (2013) Gross Domestic Product, at current prices

Agriculture is smaller as a proportion of GDP and exports and while agriculture “employs” more people, these people are very unproductive, and have incomes around 20% that of salaried employees.

To understand the impact of industry on the GDP, we can compare the percentage of the GDP of industry sectors (in red) to sectors of similar sizes. 

Source: Geostat (2013) Gross Domestic Product at current prices by 45 activities 

If one looks at the sub-sectors, the numbers are similarly impressive. “Metal and metal products” was worth 2.5% of GDP. “Chemical and non-metal mineral products‟ (mostly fertilisers and cement) was worth 2.2% of GDP. This makes both of these subsectors roughly the same size as the entire telecommunications sector (worth 2.9% of GDP) or banking (worth 3%) and makes both sub-sectors far more valuable than the entire restaurant and catering sector (worth 1.8%) or the hotel sector (worth 0.6%). Another manufacturing sector, that of “transport and manufacturing equipment” (worth 1% of GDP), was roughly the same size as manufacturing of alcoholic beverages- including wine (also 1%).

Of all of the sub-sectors a few are particularly important; manganese, steel, fertiliser, cement, trains, airplane parts, electrical wire and other metal products stand out. These sectors generally gain their comparative advantage from a combination of existing plant infrastructure and/or available local inputs. The plants are often old but would be enormously expensive to replace and are often extremely well connected in terms of transportation infrastructure, physical buildings and electricity transmission provision. They also depend on the utilisation of locally available resources, whether that is manganese, scrap metal, lime, aggregates, or relatively inexpensive electricity.

All of these sectors also have the characteristics that Georgian growth needs if it is to be inclusive and sustainable. While the reforms of the UNM government, after 2004, brought high growth, they did not reduce unemployment and they left Georgia with a unsustainable balance of trade deficit.

To correct for these problems Georgia needs to encourage growth in high-employment export-oriented sectors. As manufacturing goods are all tradeable, the manufacturing sectors are all export-oriented or potentially so. Export orientation is particularly important because export-oriented growth is not constrained by local demand growth and because increase in exports is needed to fix Georgia‟s balance of trade deficit.

As a high-employing sector, growth in manufacturing industry will bring jobs and have large regional employment multiplier effects.

The fact that governments should promote growth in sectors that can act as „growth engines‟, has become fairly well accepted in recent years, as a necessary component of economic development policy. Economists from Harvard and Cambridge have explained that dramatic and structural growth requires government support.

The form of the support is the proper subject of discussion between businesses, government and the wider public. It may include direct support, like protections from foreign competition, in the short term, or guarantees of low transport and energy prices. But more than anything, what investment development will need is an on-going dialogue with the government on public policy reforms. It will also need the sectors full inclusion in the platform of economic opportunities elaborated by the Georgian Government in business-fairs, meetings and speeches across the world.

This piece is a modified version of the executive summary of an analysis of the heavy industry sector, provided for Rustavi Steel in 2013