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Georgia without Digital Economic Policy

Economists carry out a modeling of economic growth on the ground of capital, workforce and digital technologies.

Nowadays, digital processes have become an integrated part of not only economy, but also digital economy. Actually, contemporary economy relies on digital technologies, as well as on digital products and services, electronic commerce, digital processes, internet, application of digital information and knowledge, Blockchain system and other digital economic activities.

In contemporary political era, Georgia should treat digital technologies as a sector of vital importance, which comprises stimulating potential for state economic growth. It is clear for everybody that digital processes have considerably reshaped all aspects of life, sizes, sorts of economic activities, business models and platform of ecosystems. These developments have made direct or indirect influence on all citizens of Georgia, business organizations or environment.

The fact is that potential power of digital economy subjugates public and business sectors to influence of digital innovations.

It should be noted that the higher digital readiness of a country, the faster digital economy is shaped, the higher benefits and faster economic activities are and on the contrary, the lower readiness, influence of digital processes provokes new challenges and reduces competitive capacity of a country.

Research works prove that quantity of companies, which represent a part of digital economy increased by 30% in 5 years and consequently, quantity of job place has grown by 5%. It should be noted that 9% of companies working in digital sector creates 7% of national production (Economist.com).

Capitalization of internet companies creates the sense of MIRACLES in global digital economy. Each of similar companies receive much more revenues compared to Georgian economy. Namely: Google/Alphabet (market capitalization 510 billion USD), Amazon (341 billion USD), Facebook (340 billion USD), Tencent (206 billion USD), Alibaba (205 billion USD), Priceline (63 billion USD), Uber (63 billion USD), Baidu (62 billion USD), Ant Financial (60 billion USD), SalesForce (market capitalization – 57 billion USD in 2016).

Challenges of Digital Economy in Georgia

Georgia possesses resources and potential of digital economy, however, the country cannot make a use of its benefits and potential, because of digital economy policy. Namely: the country does not carry out measures for influencing digital processes; financial support for digital activities is small. Results of similar efforts are also unimportant; measures for digital economy growth is fragmented; programs promoting employment on digital market and stimulating creation of internet technologies are small; existing tax-budget system cannot ensure sustainable development of digital market and internet business; the current taxation system of internet commerce and taxation tariff frustrate electronic commerce in its inception. Even today, in homeland of the Internet, the USA, several states are free of tax on electronic commerce (for internet users). Regretfully, in Georgia consumer internet product with price of more than 300 GEL is subjected to taxation; economic diplomacy cannot ensure preconditions for digital economy upturn and development;

Digital Economy Perspectives

Regretfully, it should be noted that  not perception and understanding of digital economy potential is problem for Georgian politics, but creating and carrying out digital economic policy. Political environment realizes benefits of digital economy theoretically, but practical understanding and perception is expressed in scales of digital economy – scales of Georgian digital economy are unknown. At initial stage, digital economic policy should be formulated in the following directions, for bringing Georgia’s digital economy into effect:

Infrastructure and Technologies.

Today the country cares for arranging infrastructure, however, paces of expansion of technological basis remains low;

Policy

There were many announcements for developing distinct laws in relation to digital policy. It is necessary that the Government, through cooperation with  business and scientific sector, create legislative basis for developing digital environment and regulation, foster arising internet companies and stimulate internet market;

People and knowledge of digital technologies, growth in knowledge of digital technologies should be carried out through cooperation with higher educational institutions, with initiative groups focused on electronic governance field.

Electronic governance field may be outlined in a complex way by scientists-researchers and business sector oriented on the mentioned field;

Strategy and Responsibility

Based on research and analysis of digital environment, the Digital Georgia strategy should be developed that should comprise specific programs and short-term plans, as well as responsibility for fulfillment of these programs and plans. Strategy should take into account influence of global systems, global challenges, national peculiarities and perspectives;

Taxation-budget system

Tax based on internet commerce should be abolished to stimulate intensification of activities of internet users, creation of internet products and services and consequently, creation of internet companies. Programs promoting activity of digital economy should increase, as well as stimulating measures and financial support. In whole, we will receive sustainable development of electronic commerce and formation of digital economy;

It should be noted that the Authorities and political environment should introduce rational directions of economic activity to the society, as well as efficient strategy, specific programs and digital economic policy. All these factors are guaranteed by scientific-research resource. Aspirations  and readiness of this resource is real.

Conclusion

It is necessary that the Authorities (Ministry of Foreign Affairs), jointly with partner countries, deepen bilateral relations in digital economic field; carry out economic diplomacy for growth and development of digital economy; direct foreign policy strategy for outlining digital business environment, create exports conditions for digital products  and shape digital commerce space; promote digital economy security of the country. It is worth noting that upgrading of social and economic activity of the society, strengthening of the society and growth in welfare are achieved through employment of digital environment, development of digital markets and active use of scientific resources.

Last Tendencies of Georgia’s Foreign Trade

According to the national statistics service of Georgia, Georgia’s foreign trade turnover rose in 2016, but, at the same time, it declined. In terms of statistics, imports of medications against Hepatitis C  create the picture of growth, without which both components of foreign trade decrease  imports and exports, would decrease.

According to information published by national statistics service of Georgia that reflect foreign trade turnover, Georgia exports kept dropping on foreign markets throughout 2016.

In general, in 2016 Georgia’s foreign trade turnover in commodity  (without undeclared trade) made up 11.966 billion USD (almost 12 billion USD), up 20% year on year; including exports marked only 2.114 billion USD, down 4% year on year, Imports constituted 9.852 billion USD, up 27%. It is worth noting that in the reporting period, under the US grant program, medications against Hepatitis C were imported, without which specified imports would constitute 7.233 billion USD, down 1% year on year. Georgia’s negative trade balance in 2016 marked 7.738 billion USD, 65% in foreign trade turnover.

Trade turnover with EU has increased in total foreign trade statistics and its volume constituted 3.601 billion USD, up 14% compared to the same period of 2015; including exports marked 571 million USD, down 12%, amid free trade agreement between Georgia and EU.

Meanwhile, Georgia’s imports with EU countries made up 3.30 billion USD, up 20% year on year. One of the reasons for such growth in imports is related to imports of free  medications against Hepatitis C.

EU’s ratio in Georgia foreign trade turnover made up 30%, including 27% in exports and 31% in imports (32.29% and 33% in 2015, respectively).

Government of Georgia assures that it has been taking tireless efforts for developing exports potential, making various subsidies and seeking new markets. The Government is content with existing statistics. Georgian Prime Minister Giorgi Kvirikashvili noted that exports statistics declined because of contraction in global prices:

“Exports have increased in quantitative terms, but declined in value, because prices have dropped on main exports markets. Exports could not come up with imports and that’s why we have current situation. Imports correction has already started and GEL exchange rate will be stabilized definitely”, the Prime Minister said.

GEL exchange rate stabilization is a necessary precondition for growth in foreign trade turnover and strengthening exports. Merab Janiashvili, representative of Association of Young Financiers and Businessmen (AYFB) noted that Georgia’s foreign trade turnover were caused by economic difficulties in the former Soviet Republics.

According to Geostat indicators, Georgia’s foreign trade turnover with CIS countries made up 2.721 billion USD in 2016, down 3% year on year, including exports marked 739 million USD, down 12% year on year and imports constituted 1.983 billion USD, up 1% year on year.

Ratio of CIS countries in Georgia’s foreign trade turnover made up 23%, including 35% in exports and 20% in imports (28.38% and 25% in 2015, respectively).

Ratio of ten major trade partners in Georgia’s total foreign trade turnover made up 68% in 2016. Canada emerged as a major trade partner with 1.8 billion USD, thanks to medications against Hepatitis C. Turkey is second and Russian Federation is third.

As to key exports and imports products, in 2016 cooper ores and concentrates ranked first in top ten exports items with 312 million USD and constituted 15% in total exports.

Filbert exports marked 179 million USD, 9% in total exports. Ferroalloys groups ranked third with 169 million USD (8% in total exports). Based on the mentioned indicators, Irakli Makalatia, president for Center of Economic Policy Experts believes that Georgia fails to employ exports potential at full capacity;

“We cannot penetrate markets, because we cannot ensure high quality, on the one hand, and state economy is not developed to the level, when required products will be manufactured”.

Like Irakli Makalatia, many other economic experts believe that for employment of exports potential and growth in foreign trade turnover, economic policy should be revised. According to economists, Government should prioritize subsidization of not specific fields or enterprises, but,in general, improvement of business environment in the country.

Professor Rati Abuladze, founder of Electronic Management Research Academy