Can Georgia Expect Getting the Industries Withdrawn from China?

Edgar_Degas_-_Portraits_at_the_Stock_Exchange_-_Google_Art_Project
Edgar Degas "Portraits at the Stock Exchange" // Public domain

In times of crisis, it is easy to make mistakes, and no one can be infallible. One of the most characteristic signs of the crisis is its politicization. All parties want to prove that they have the best program and ideas to get out of the crisis. In fact, such modeling is limited by the opportunities that the country’s economy (and thus also entrepreneurs) can have.

Transfer of Investments and Production from China to Georgia

Criticism of the government of the People’s Republic of China in connection with Coronavirus may sooner or later be reflected in changes in global politics. I consider it particularly important that the PRC, Russia, and their followers understand that the world, after all, will inevitably expect more transparency, freedom, and open, honest cooperation from them.

It is difficult to say how this episode will continue and end, but I would like to express my opinion on the statements in Georgia that investments and production from China will be shifted away by Europeans, Americans, Koreans, and Japanese, and we should try our best to bring them to Georgia.

In other words, first, they are shifted away from the PRC and then second, – brought to Georgia.

How have large-scale production and investments arrived to the People’s Republic of China?

It is important to understand how these productions and investments arrived to China, what were the factors that attracted investors from the listed above countries, and what led their governments to cooperate with the PRC government.

Probably everyone has a prepared answer – a cheap labor force. More experienced people can also add – the large scale of the country. What could be added is probably also the strong hand and influence of the PRC government, which has ensured a solid protection of foreign investments. There may be other factors as well, but the PRC is so huge that they may not be uniform everywhere.

Changes in China

Everyone who has been to the PRC lately is talking about the amazing changes that have taken place in front of us everybody. This is all the more noticeable if you compare some of its neighbors – the Russian city of Vladivostok is almost the same as it was 30 years ago, when its Chinese neighbor Harbin is almost impossible to recognize.

Tens of huge rich cities have sprung up, the rural population has shrunk from 900 million to 400 million, and economic growth has been reflected in double digits for more than two decades.

What should not be overlooked is the 30 years that it took for PRC to attract the attention and trust of the world’s best brands. Its population, like ours, comes from the communist past and is in the process of learning to live, work and do business in market conditions.

This, for example, means a low level of labor qualification (education) and work culture (discipline) in Georgia – according to a 2018 Global Competitiveness Index survey of 100 Georgian businesses, respondents named these problems at the level of 19% and 10% respectively among the business difficulties.

If we have a lack of investment in Georgia, one of the main reasons is poor quality, low productivity and disproportionately high cost of operations.

This is how we can see it in real life. Let’s assume that a miracle happened and a large western company decided to move production to Georgia – we are ahead of not only the Chinese, but also others in the global competition. The manager of the company (to simplify) arrived in Georgia and started hiring staff – it is necessary to find 200 qualified, highly productive and globally competitive workers, in the shortest possible time.

If we do not follow the illusions, it will be very difficult and, in many cases, impossible – so many qualified and free people will be hard to find in Georgia. Raising the qualifications of others can be costly and time consuming.

In the future, the company’s managers will have to fire many employees and hire others (as far as labor law allows).

This can be very costly in terms of product price and global competition. The company may need to invite workers from China or elsewhere, which, though, will create other types of political costs.

What Does It Cost and What Is the Quality of Work?

Price and Quality – why are these two components so important for business? These components determine the real value of human resources – what contribution a firm employee makes to product creation – that is, what his productivity is.

Like any resource, labor is valued the same way – what it costs and what quality it is. Chinese service personnel – human resources – 30 years ago were not highly productive and that was why just the big market was not a deciding factor in attracting the highest quality brands.

We remember how arrogantly we used to look at Chinese products 10 years ago.

However, over the years, their qualifications and productivity have improved, and even now, no one is surprised by the involvement of PRC firms even in the highest technologies. Moreover, they are already competing with leading countries.

Many and Great Exams in China

Let’s go back – to bringing production and investment from China to Georgia. It was not easy for the West to choose the PRC, it has passed many and great tests, including in terms of productivity improvements, and has become, in this regard, a reliable partner.

Most importantly, this process has enabled developed countries with such industries to switch to more interesting, high-tech and high-value areas, and to purchase these products cheaper already from the PRC. That is, David Ricardo’s theory of comparative advantage from the 19th century has proven to work exactly that way. Challenging this order is quite a difficult task.

Developed nations, representatives of their firms, now, if they have really decided to abandon the PRC, have to look for places where the same conditions – scale, productivity and confidence – will be easily achieved. Before that it would have been just suicide.

Will Georgia be among these places? It would directly depend on the fulfillment of these conditions. I also think that transparency, freedom, openness and honest cooperation are required of us too.

It is also incorrect to think that it will be enough if the governments of these rich countries have the political will to shift such investments to us, then they should give guarantees to the investors.

Another fact is that the PRC has many other neighbors, which are at least larger-scale economies then ours. The population of Indonesia, for example, is 267 million, Vietnam – 95 million, the Philippines – 109 million, Thailand – 70 million, Malaysia – 45 million, etc.

Malaysia also has a good experience working with Japanese and Korean firms. Also, when we think about qualifications and productivity, we must remember the Eastern European nations, which have achieved great success and implemented many of the best industrial projects.

Aren’t There Advantages?

Georgia also has its advantages – for example, low taxes compared to developed countries and some advantages of doing business. We have several important trade agreements that we have not yet been able to use to our advantage.

At the same time, we still have a lot of problems that are not easy to solve – for example, in the field of private property protection.

There is also the geopolitical tension in our region, which will probably not calm down quickly (parasitising at this has not benefited us much from geopolitical advantages).

In order to attract investment, we need to increase our advantages so that they far exceed the existing, objective disadvantages, including objective ones like low qualifications and productivity.

It is possible to create such advantages, but it will still not be a guarantee that investments and production will still come to us but not to the countries of the aforementioned Asian tigers.

Who Buys a Spoiled Product, Even If It’s Cheap?

Once again, productivity is the most important issue. This means what is the value of the labor the business buys with a certain amount of money. If this value is small in one country, the business tends to go to another country.

Therefore, talking about the fact that the “labor force” is cheap in Georgia and we have a chance to increase production – is an illusion until, at least, productivity increases sharply. Cheap is the good that we value high and we assume we pay relatively less. We don’t buy spoiled products, no matter how little we would pay for them.

We must also remember that the PRC will use all available international instruments to prevent discrimination. There are also big financial interests that have to be also taken in account.

In addition, PRC is capable for technological espionage – a quick “divorce” with it will inevitably lead to the intensification of such activities, which will be very costly for developed nations. They and Georgia, therefore, should assess the situation sensibly at this stage.

Concerns

Our concern, first of all, is productivity and high quality of business, so that investors can be sure that their products will be cheap and high quality in Georgia and can withstand global competition, this can ensure more investments.

However, achieving this takes time.


The article was originally published on May 6, 2020, at the Georgian website of the Radio Free Europe -Radio Liberty


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