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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Cancellation of SOCAR’s Urea Plant in Kulevi; Conflicting Narratives

This week, Azerbaijan state-owned oil and gas company SOCAR announced that it was cancelling its construction of a urea plant at its Kulevi Free Zone on the Georgian Black Sea coast. The cancellation of this $700 million project, agreed with the previous government in 2012, has come as a blow to investor sentiment.

SOCAR’s local management claim that the reasons for cancellation are complex,  but they have ruled out corruption as a factor in the cancellation. From Commersant.ge

A cancellation  of the construction of a carbamide plant in Georgia by SOCAR (State Oil Company of Azerbaijan) is associated in particular with fluctuations in the energy market, long-term gas supply and other issues, Vagif Aliyev,  head of Investments Department of  SOCAR, told Trend.

According to him, SOCAR with the full responsibility declares that ” no other subjective factors have effect  on the  adoption of this decision.”

Aliyev also says  that in recent days the media and social networks spread unjustified and  untrue speculative information about stopping the project.

As the head of the Investment Department at SOCAR adds, a  serious work has been carried out on this project for a considerable amount of time, but after these issues arose,  the project was revised which led to the project’s cancellation.

Meanwhile, the Georgian Ministry of Energy, has a different take on the issue;

In particular, the Georgian Energy Minister Kakha Kaladze said that the reason for the suspension of the project was the disadvantage of the project for the Georgian side, as well as for Azerbaijani.

Deputy Energy Minister Mariam Valishvili told  “Commersant” that negotiations are continuing at this stage, and the project is not derailed, but just delayed.

“We had to supply gas for the needs of the enterprise that we get at the social cost. It is a 20-30% increase in consumption, as the production of carbamide  is a  very energy-intensive project. We can assume that the problem is in the supply of gas – about 1 billion cubic meters per year, “- she notes.

According to her, this is due to the fact that the opening of the Kulevi free industrial zone was delayed which had to include a carbamide factory construction.

It is interesting that SOCAR declare the project to be cancelled, while the Ministry declare it to be simply postponed. Given that SOCAR supply the vast majority of Georgia’s gas for residential and industrial use, it seems odd that a lack of gas supply would cause the project to stumble; SOCAR’s gas pipelines have substantial capacity and are well engineered.

In exchange for gas transit through Georgian territory, SOCAR is obliged to provide gas to Georgia at a very concessional rate for domestic use. To what extent the Energy Ministry was concerned that a billion cubic metres of gas annually for urea manufacture would disrupt this concessional residential supply is not known to the public.

The implications for Georgia’s agricultural sector are significant. Around half of Georgian farmers use fertiliser presently. Of those, more than 90% solely use nitrogen fertiliser rather than blends such as NPK or other products. Currently, Rustavi Azot , owned by entrepreneur Roman Pipia, and supplied with gas from Russia, has a dominating position in the Georgian market, being the sole local manufacturer of nitrogenous fertiliser in the country. Rustavi Azot produces ammonium nitrate as well as anhydrous ammonia. While SOCAR’s urea plant at Kulevi was aimed largely at the export market, domestic sales would have stimulated some price competition in the market from which farmers could have benefited. Urea is more amenable to use in solution than ammonium nitrate and has fewer compatibility problems when mixing with other fertilisers.

It is to be hoped that this project can go ahead at some time in the future. Substantial construction projects like this one help stabilise the local currency and create rural jobs in an area where many IDP’s have been settled.

UPDATE:

SOCAR Georgia’s General Director confirms that the Kulevi urea plant project is postponed, not cancelled. From Commersant.ge

The carbamide plant project in Georgia was temporarily postponed, but not closed –  Director General  of SOCAR Petrolium Georgia Mahir Mammadov states.

According to him, various speculations appeared in the media in this regard  that do not correspond to reality – the factory cannot be built until the completion of the Shah Deniz project, which is why the project was simply postponed until the appropriate time.

“We had some problems in connection with the project due to the economic situation in Azerbaijan. Therefore, the construction of the plant has been delayed, but we will definitely return to this project. It was our decision and the government of Georgia agreed with it. So the project is postponed, but not cancelled, “- says  Mahir Mammadov.”

The world’s largest free trade zone is coming – what will it mean? | euronews, world news

The Transatlantic Trade and Investment Partnership (TTIP) between the EU and the USA is still being negotiated, and it has interesting implications for countries with existing Free Trade Agreements with those two entities. For the USA, the implications for its Canadian and Mexican partners in NAFTA are still being considered. For the EU, its free trade partners in many cases are still considering whether to get on the TTIP train for free access to the USA market or not. Such countries include Turkey, Jordan, Morocco, and of course the Eastern Partnership countries of Moldova, Ukraine and Georgia. Just as the DCFTA with Europe will involve a certain amount of pain, and some enterprises may fail as a result of increased regulation, restructuring industries to comply with US norms will be complicated. This paper by a Polish graduate student outlines some of the key issues quite clearly.

The issue of Genetically Modified Organisms will be an interesting one, as the EU and USA have a very different approach. GMO approvals in Europe must pass through political as well as technical assessments, whereas the US approach is more technical in orientation. To what extent a TTIP member state like Georgia would streamline GMO approvals to meet US expectations remains to be seen.

 

The EU and US are in talks to create the world’s biggest free trade zone, claiming it will make both regions richer than ever.

But critics question the alleged economic benefits of the deal – called the Transatlantic Trade and Investment Partnership (TTIP) – and say the inclusion of investor-state settlement dispute clauses will undermine democracy.

Activists will take to the streets on Saturday (April 18) in what is expected to be one of the biggest protests against the EU-US trade deal.

A huge alliance of groups have come together to organise a global day of action (#A18DoA) against the Transatlantic Trade and Investment Partnership (TTIP).

Negotiations began in 2013. The ninth round of talks is set to begin in New York on Monday, April 20, 2015.

Karel De Gucht, former EU commissioner for trade, said last year there was a “window of opportunity” to tie up the deal in 2015, or early 2016.

Everything you need to know about the TTIP trade negotiations

Why do we need an EU-US trade deal?

Talk of a trade deal between the EU and US has been around for decades but the catalyst for action was the economic crisis in 2008.

The powers-that-be decided, because the EU-US trade relationship was already the biggest in the world, it could be a relatively cheap way of boosting both economies.

The idea is that by removing trade barriers it will make it easier and simpler to buy and sell goods and services.

Trade barriers include differences in technical regulations or standards. The EU cites manufacturing a car as an example. At present, the vehicle could pass safety regulations in the EU, but would then have to go through another process for approval in the US.

What are the benefits of TTIP?

The removal of tariffs and harmonising of regulatory frameworks could bring significant gains for EU and the US, according to a report by the UK Centre for Economic Policy Research (CEPR).

It claims the deal would boost the EU’s economy by 119 billion euros a year and the US’ by 95 billion euros.

The report also says the deal would create new jobs for high- and low-skilled workers.

But some have disputed the economic riches the trade deal will allegedly bring.

They include Germany’s economy minister Sigmar Gabriel who said in April 2015: “I don’t believe the wondrous calculations for economic growth from TTIP. All the estimates about its impact… give an impression of voodoo economics.”

Another is Dr Gabriel Siles-Brügge, from the University of Manchester, who says the figures claimed by CEPR are ‘vastly overblown and deeply-flawed’.

He claims EU calculations assume that almost all sectors will be standardised, of which there is little chance, he adds.

A report published in 2013 by the Seattle to Brussels Network echoed concerns about how many jobs the deal would create.

It cited the NAFTA deal in 1993 – designed to boost investment and trade between the US, Canada and Mexico – claiming it resulted in the loss of nearly one million jobs.

Where are the main differences of opinion?

One key area where the US and EU differ is genetically modified foods.

The production of GM foods sees DNA from another organism added to them to create a perceived advantage. For example, proponents of GM crops argue they can be made to be more resistant to pests, thereby increasing productivity.

The EU has some of the strictest GM regulations in the world (each case is subject to a science-based evaluation by the European Food Safety Authority before going before the European Commission) and has authorised just 52 to date.

The US, on the other hand, is the largest commercial grower of GM crops in the world. It wants the EU’s regulatory process to be harmonised.

The EC says the trade deal will not see laws changing on GMOs: “Basic laws, like those relating to GMOs or which are there to protect human life and health, animal health and welfare, or environment and consumer interests will not be part of the negotiations.”

Friends of the Earth in Europe said: “US negotiators at the talks have been clear that one of their main aims is to increase market access for US agri-business.

“The US negotiators argue that European regulations should take a similar approach to US regulations and be based purely on scientific assessments, often provided by the biotech companies themselves – rather than needing the political approval of the European Council, Commission and Parliament, which allows wider impacts such as ethics and the impacts on the environment and on society to be taken into account.”

There is also concern that US producers will be able to sell their meat in European markets, which is produced with different standards. For example chickens in the US are disinfected with chlorine, a practice banned in Europe.

via The world’s largest free trade zone is coming – what will it mean? | euronews, world news.

Unintended Consequences: How the U.S. & Canada Nearly Destroyed Wine

Interesting to see how government intervention in Canada and the USA resulted in the opposite effect of that desired. It would be interesting to compare this with Georgia’s experience in the 1980’s, when Gorbachev’s anti-alcohol campaign to reduce USSR alcohol consumption resulted in thousands of hectares of Georgian vineyard being uprooted. There is no evidence that Soviet alcohol consumption declined as a result of Georgian vineyards being devastated; given that alcohol can be made from anything containing sugar or starch, such as stale bread, mill run or green potatoes, bootleggers will have just swapped to distillation of cheap spirit instead.

At one point in Kym Anderson’s new book about the Australian wine industry he reflects on what can be done to shorten that country’s current wine slump and to get things sailing again on an even keel. One of his suggestions caught my eye:

“Governments need to keep out of grape and wine markets and confine their activities to generating public goods and overcoming market failures such as the free rider problem of collecting levies for generic promotion and R&D.”

This is more than the simple Adam Smith “laissez-faire” idea. Anderson’s book clearly demonstrates the law of unintended consequences — how well-meaning government policies sometimes have had unexpectedly negative side-effects. No wonder he recommends a cautious approach to wine and grape policy.

I was reminded of this when I was researching the history of the Canadian wine industry for a recent speaking engagement in Ontario. I was struck by Canada’s experience with Prohibition in the 20th century, how it differed from the U.S. experiment, and how both ended up crippling their wine industries but in very different ways…….

……………..Thus did government policy in both Canada and the United States create wine booms during their respective Prohibition eras, but the worst kind of booms: bad wine booms. Quality suffered as quantity surged. It is no surprise that consumers turned away from wine once other beverages were available. It took decades for these industries to recover.

Both the Canadian and U.S. wine industries are vibrant and growing today, having recovered from the crippling effects of poor quality wine. But they both are still hampered by other policies — especially regarding distribution and sales — that date back to the end of Prohibition. Economic policies can obviously have unintended effects and the shadows they cast can be long indeed.

No wonder Kym Anderson is skeptical about government interference in the Australian industry. Prohibition is an extreme case, to be sure, but such cases clearly show the unintended consequence potential that exists even with other seemingly harmless proposals. A cautious approach makes sense.

The article can be read in its entirety here  . The blog is well worth reading; while focussed on the US market it analyses global wine markets in a logical and methodical manner.

The Wine Economist

At one point in Kym Anderson’s new book about the Australian wine industry he reflects on what can be done to shorten that country’s current wine slump and to get things sailing again on an even keel. One of his suggestions caught my eye:

“Governments need to keep out of grape and wine markets and confine their activities to generating public goods and overcoming market failures such as the free rider problem of collecting levies for generic promotion and R&D.”

This is more than the simple Adam Smith “laissez-faire” idea. Anderson’s book clearly demonstrates the law of unintended consequences — how well-meaning government policies sometimes have had unexpectedly negative side-effects. No wonder he recommends a cautious approach to wine and grape policy.

I was reminded of this when I was researching the history of the Canadian wine industry for a recent speaking engagement in Ontario. I was struck by Canada’s experience with…

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Debate on Land Ownership

ISET Policy Institute recently held a debate on foreign ownership of Georgian farmland. Simon was one of the panellists.

As readers will recall, since June 2013 the Georgian government imposed a moratorium on farmland purchasing by foreign individuals or foreign-invested enterprises. In 2014 a challenge by an Austrian citizen to this ban was upheld in Georgia’s constitutional court, but despite this the Georgian Ministry of Justice still refuses to transfer land titles to foreign invested enterprises or individuals.

A new draft Land Law was made public by the Ministry of Justice, over 2 1/2 years after the current government gained power. Regrettably consultation with key stakeholders has been less than ideal. The basic terms are:

Foreign-invested enterprises may acquire land between 20-200 ha without special permission. Land plots outside this range require special permission.

Foreign individuals may acquire land plots of between 5-20 ha, under one of three conditions:

(a) The individual has a Georgian spouse

(b) The individual lives in a “Georgian Household”

(c) The individual holds Georgian residency

If the individual loses their status (a), (b) or (c) , they must sell the property within six months.

A discussion from various investors, business organisations, parliamentarians and government officials followed.

Our comments:

(1) It appears this draft with developed by people with no knowledge of agriculture, and the restrictions appear completely arbitrary.

(2) It is unclear that the legislation will protect smallholders any more than existing legislation does.

(3) Excluding or restricting foreign capital from broadacre cropping of basic commodities such as wheat, sunflower, and maize (which require properties of 1000-3000 Ha to be produced cost-effectively) damages Georgia’s national security. In particular, Georgia’s dependence on imported wheat for bread (over 70% imported from Russia, Ukraine and Kazakhstan) makes Georgia’s future as a sovereign state vulnerable to naval blockade and aerial destruction of road and rail links with Azerbaijan and Turkey, should a future conflict with our northern neighbour resume. The full force of foreign capital and expertise, which is typically obtaining yields four times that of domestic smallholder producers, should be brought to bear on this segment for the food security of the nation.

(4) The restrictions on individual purchases almost certainly conflict with the Georgian constitution, and hence will be challenged in court once again. This will likely delay the adoption of a new land law even further, damaging Georgia’s credibility as an FDI destination.

(5) A six-month deadline for disposing of a farmland asset is unreasonably short.

(6) Forced sale due to loss of residency could be abused by the Ministry of Justice to expropriate land from foreign individuals. In addition, it fails to recognise the highly mobile nature of professional people today, who may take assignments all around the world during their working life while returning to a home base, or several homes bases, between engagements.

(7) Being a member of a “Georgian Household” must be the coyest euphemism for a foreign businessman shacked up with his mistress ever conceived………

To develop Georgia’s 2 million hectares of farmland to a fully productive state will require more than USD$2 billion in state expenditure on basic infrastructure over the next decade (irrigation, drainage, roads, electricity and gas) and a further USD$8 billion in private capital on farmland property development and processing facilities. Georgia does not have the domestic capital base nor the managerial capacity to accomplish this without foreign investment, technology and managerial inputs. Any legislation that impedes the flow of capital into the agricultural sector will ultimately harm the very people it is intended to protect.

Irrigation Water Discussion: Inclusive Growth Dialogue at ISET Policy Institute

ISET Policy Institute on October 23 invited Simon to address representatives of government, NGO’s, industry and academia about issues related to irrigation water access in Georgia.

P1040764

The video of the dialogue is presented below. Simon’s commentary can be seen at 1.20 and 20.30

Hvino News | Georgian Wine News: Georgia embraces tougher wine producing regulations

Unfortunately, the heavy hand of government once again falls on long-established industry practices that benefited both wineries and surrounding communities.

By banning sales of grape pomace (“chacha” in Georgian), the state is cutting off a useful source of revenue from wineries; sale of pomace to small village distillers who make their own chacha/aquavit/grappa from the pulp and sell it locally. No compensation is to be paid to such distillers as far as anyone knows.

Attempts to incorporate grape pomace in dairy cattle feed are now also to end as a result.

While poor quality wine made from pomace, or grape concentrate, or even jelly crystals has been an issue in the past in the Caucasus (both South and North), surely the principal of caveat emptor should prevail? It is arguable that this is only problematic if the product is fraudulently passed off as a premium branded product.  If low income people in the village are willing to pay for low-quality wine made from byproducts of vinification, and the end product is not unduly hazardous to health, then why interfere in normal market mechanisms?

29.10.2014. The Georgian government is taking a tougher stance on the country’s currently relaxed regulations on wine productions and making it illegal for wine producers to sell the grape pomace, a grape residue left after making wine.In particular, the wine producers will be obliged to use the pomace, according to today’s resolution of the Prime Minister.The government believed the new rules acted as a preventive measure that would further protect the wine sector and eliminate the production and distribution of low-quality wines.Chairman of the Agriculture Committee of the parliament of Georgia Giga Agulashvili believed there were occasions when pomace had been produced for secondary use. “Furthermore, it was resulting in adding sugar and water to the pomace and low quality of wine being produced,” Agulashvili said.The MP believed the resolution would encourage the production of pomace oil and use of pomace as a bio-fertilizer.

via Hvino News | Georgian Wine News: Georgia embraces tougher wine producing regulations.