A new study by the ISET Policy Institute has interesting insights into Georgia’s growth performance:
This study applies the Growth Diagnostics framework and attempts to identify the binding constraints to economic growth in Georgia. While many policies potentially promote economic growth in practice only policies that relax the binding constraint do so. In contrast, policies that relax non-binding constraints will by definition do little or nothing to promote economic growth. This study builds on an existing growth diagnostics exercise by the Government of Georgia and the Millennium Challenge Corporation, but comes to different conclusions. The existing study found that human capital and road infrastructure are binding constraints to economic growth in Georgia. In contrast, we find that lack of property rights, broadly interpreted, is the binding constraint to economic growth in Georgia. We argue that lack of property rights is unlikely to be the risk of expropriation. Instead, property rights have to be interpreted broadly, and encompass issues such as political and institutional stability, regional conflicts, the rule of law, and judicial independence.
Property rights of course are meant in the way economists understand them. Property rights are any factors that affect current and expected future income derived from property. Expropriation trivially affects the income stream, but so do political and institutional instability as they increase uncertainty about the future economic and business environment. And so do of course reform reversals, regional conflicts, the rule of law, and judicial independence. Unfortunately with this finding there is no easy and quick fix. Improving political and institutional stability takes time, and depends on the actions and the goodwill of not only the government, but also opposition parties, civil society, media, and neighboring countries.
Comments
To bring income per capita to acceptable levels, Georgia needs high productivity jobs. Such jobs can only come from investment in low-risk-low-return projects requiring large fixed investment. Now, with the exception of hydroelectricity, most new projects currently implemented in Georgia are of the high-risk-high-return type (commerce, tourism, trade). And they are small. A typical project of this type does not provide permanent employment opportunities for high (technical) skill Georgians. The latter are thus forced to seek opportunities abroad. [If in doubt, ask yourself how many Georgians IT engineers with the top CICSO certificate are currently working in Georgia. As far as I know, only one.] And whenever a Georgian company needs an engineer, it can import one from Germany, Italy, Turkey, Israel, Ukraine, or anywhere else. Georgia poses no visa or labor permit requirements on the relevant countries and foreigners are traditionally very well treated in Georgia. Thus, we have an equilibrium situation.