Guy Edmunds in Tbilisi -
The European Bank for Reconstruction and Development’s most recent economic outlook makes dismal reading for countries in the Caucasus and Central Asia. Deepening recessions in Russia and Ukraine will lead the Belarusian and Armenian economies to contract in 2015, the bank says, while Kazakhstan will only grow by 1.5% and Georgia by 2.3% – less than previously thought. After years of encouraging catch-up growth before the 2008 financial crisis, the danger is that some countries become “stuck in transition” – highlighting the need for new economic drivers.
The divergence between two ex-Soviet countries, Georgia and Estonia, illustrates the problem. According to the the World Economic Forum’s Global Competitiveness Report in 2014, which compares 144 countries worldwide, Georgia’s GDP per capita is $3,604; Estonia’s is $19,031. Georgia’s higher education and training comes in 92nd place out of 144 countries; Estonia’s is 20th. In terms of financial market development, Georgia lies in 76th place, while Estonia is in 29th. Georgia’s worst rankings lies in business sophistication, where it comes in 113th place, and innovation, where it languishes in 121st place.
To make Georgia more competitive, Nodar Khaduri, the finance minister, highlights the need to improve the country’s human resources, strengthen vocational education, and increase access to finance. Focus on macro-level factors is vital, the EBRD concludes, but much can also be done to support innovation at the level of individual firms. Here, laggards such as Georgia have an advantage: rather than reinvent the wheel, they can simply need to adopt and adapt innovations from elsewhere.
Go forth and innovate
Innovation can consist of many things, the EBRD’s Transition Report 2014 points out: new products and processes, or novel marketing and management techniques. Such changes can increase low productivity rates, which are a particular hindrance to growth. In general, emerging market firms are less productive than those in richer countries, but that masks significant variation within emerging markets. The challenge is for less productive firms to follow the example of the most productive ones.
Experience to date in emerging markets suggests a number of common themes. International competition forces exporters to become more innovative than non-exporters. Moreover, although most innovation takes place in high-tech sectors, it can have much greater impact in low-tech sectors. Here, governments can play an active role in persuading companies to innovate, as the firms that are most hostile to innovation are likely to be those who would most benefit from it.
That highlights the importance of good management. Foreign-owned companies have an advantage, since foreign owners are quicker to shake things up and improve the ways firms are managed. Attracting multinational corporations is particularly important, says Beata Javorcik, an economist at Oxford University, as multinationals spend huge amounts on research and development, bringing knowledge into emerging markets. And that knowledge can spill over to local suppliers, who are forced to step up their game to join global supply chains.
George Chirakadze, President of UGT, a Georgian technology company, agrees. The lack of an educated workforce is a major problem, he points out, which requires significant investment. Moreover, there is a huge gap in Georgia between companies: a few large companies produce a big chunk of the country’s GDP, while others lag far behind. But since those Georgian companies have limited budgets to encourage innovation, foreign companies can play a critical role in driving things forward.
Of course, emerging markets can have advantages in some sectors. For example, Georgian banks have very modern technology systems precisely because they started from scratch, and so suffered none of the “legacy issues” that older banks encounter. Banks constitute one of Georgia’s strongest sectors.
Yet not all legacies from the past are bad. Armenia is a good example of a country that has built on its legacy and adapted it to modern times – with support from abroad. The collapse of the Soviet Union spelt the end of its flourishing state information and communications technology (ICT) industry, but an injection of cash, up-to-date know-how and confidence from US software companies (mainly owned by diaspora Armenians) brought the sector back on to strong footing. Today, the IT sector in Armenia is thriving.
Innovation is not guaranteed to work. Instead, Albert Bravo-Biosca, an economist at NESTA, an innovation charity based in the UK, recommends trial and error. One way of exploring what works and what doesn’t is through randomised control trials. Although these are widely used in development economics and the pharmaceutical industry, they tend to be much less widely used by companies, particularly in emerging markets.
Embracing innovation also requires redefining attitudes to risk and failure. Here, the education system can play a role in terms of increasing financial literacy. And firms can adjust their incentives to encourage calculated risk-taking – within reason. As the old adage puts it, you have to speculate to accumulate.
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