Growth Rate in Georgia’s Agricultural Economy and the Effect of Government Spending

Zviad Khorguashvili of the thinktank GRASS has produced a concise and rather elegant analysis of the growth rate in Georgia’s agriculture sector, and raised two excellent questions that are posed altogether too infrequently.

Has the massive expenditure of taxpayers’ money on Georgian agriculture since October 2012 resulted in greater growth than if the State had restrained its spending?  

If Georgia has a small proportion of its GDP contributed by agriculture, is that necessarily a bad thing?

The article can be read in its entirety here , but the charts are quite illuminating.

Real Growth Rate of Agriculture

Source: Geostat

The Russian Embargo on Georgian wine and other food products imposed in 2006 had a serious effect that continued to be felt until 2013. The large increase in growth in 2013 arguably can be attributed mostly to increased market access to the lucrative Russian market. Growth was still positive in 2014 but the drought seriously curtailed output amongst those farmers not using irrigation.

GDP Per Capita vs % of GDP generated by Agriculture

Source: World Bank

This World Bank data is common knowledge amongst development economists. The most productive and competitive agricultural producers in the world, such as Australia, New Zealand, Canada, USA and the EU (to a point) all concurrently have quite a small proportion of agriculture in their economies, while GDP per capita and living standards are nonetheless quite high. For some reason elements within the Georgian political spectrum find agriculture occupying a small proportion of the Georgian economy a badge of shame, which is irrational.

One should be careful what one wishes for; if the aim is to have agriculture at 50% of GDP, all one needs is to incite a vicious ethnic conflict, destruction of most infrastructure and the collapse of the formal economy, as witnessed in Somalia or Central African Republic, and one’s target will be achieved in short order.

Zviad’s call for a rigourous cost-benefit analysis is a sound one; of course taxpayers should know whether the funds they spend on particular programmes are effective. However, I would apply the proviso that cost-benefit analyses based on only two years of data (2013 and 2014) can provide a skewed outcome, given the massive impact of market access and drought on the figures, which is largely independent of government spending.

It would also be very interesting to study the correlation between growth in the agricultural economy, and previous Foreign Direct Investment in the sector (as a leading indicator, as it can take up to 5 years after breaking ground for many commercial agricultural projects to generate any cashflow). Given the tepid FDI in the sector since the ban on farmland purchase came into play in June 2013, it may not be until 2018 that the effect is fully apparent, if indeed such an effect exists. Our previous study on the effects of agricultural FDI on competitiveness suggests that such an effect exists and we did identify that the effects are not instantaneously observed due to the lag mentioned above.

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4 Responses to Growth Rate in Georgia’s Agricultural Economy and the Effect of Government Spending

  1. Adam says:

    I think it’s difficult to answer the first question satisfactorily not only because we don’t know the counterfactual (what would have happened to growth in the sector or in the broader economy in the absence of such programs and policies?), but also because much (how much?) of the economic activity that takes place in the agricultural sector is informal and untaxed.

    Consider a small-scale producer who decides to build a greenhouse on a small plot of land in order to increase production of tomatoes, cucumbers, etc. These agricultural products are likely sold to local traders or taken to the nearest wholesale market to be sold to consumers, but the value that is being created along parts of the supply chain is generally (typically?) unrecorded.

    • I agree there is a lot going on in the informal economy that cannot easily be measured. Also I agree that growth response to government spending can only be verified completely if there is a control group in the “experiment”. China has taken this approach for many policy issues since the 1980’s running trials in one county, or one province, or one Special Economic Zone, and comparing results with other regions still practicing the status quo. Given that Georgia has the Ajara Autonomous Republic, scope exists here for doing such trials, be it in agriculture spending or health care reform or any other policy change, as it has its own parliament and bureaucracy.

    • However, if government publicly announces “we caused a great improvement through higher spending and more intervention”, then this is a very open invitation to detailed scrutiny. You can’t claim it unless willing to fend off challenges.

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