An Economic Argument For Georgia's Ascension Into The European Union

An Economic Argument for
Georgia’s Ascension into

the European Union
TBILISI 2018
Max Pienkny
This report was prepared by Economic Policy Research Center (EPRC) within the frames of the project “Assessing Effectiveness
of the EU Association Action Plan for Export Diversification”.
The views, opinions and statements expressed by the authors and those providing comments are theirs only and do not necessarily
reflect the position of Open Society Georgia Foundation. Therefore, the Open Society Georgia Foundation is not responsible for
the content of the information material.
© The Economic Policy Research Center

Table of Contents
About this Project...................................................................................................................... 4
Executive Summary.................................................................................................................. 5
Introduction................................................................................................................................ 6
Methodology.............................................................................................................................. 7
Analysis of the Indicators.......................................................................................................... 7
Private Sector Competitiveness........................................................................................ 8

1. International Trade............................................................................................... 8
2. Innovation / Research and Development........................................................... 17
3. Improving the Georgian investment and business environment........................ 20
Human Capital Development.......................................................................................... 23
1. Labor Market...................................................................................................... 24
2. Improving the Health of Georgian Citizens......................................................... 29
Other Macroeconomic Impacts....................................................................................... 31
1. Current Account Deficit....................................................................................... 31
2. Access to Finance.............................................................................................. 33
Energy and Environmental Impact.................................................................................. 35
1. Renewable Energy Consumption....................................................................... 35
2. Energy Imports................................................................................................... 35
Conclusion............................................................................................................................... 37
Annex...................................................................................................................................... 38
About this Project
Today Georgia is in the process of European approximation. The country has signed Deep and Com-
prehensive Free Trade Area (DCFTA) Agreement with the European Union (EU), which assigns it both
responsibilities and obligations. Hence, it is of critical importance to analyze the economic opportuni-
ties following this process. It is equally important to assess how Georgia uses new openings and what
needs to be done, in order for the country to share the best practices of the Eastern European countries,
which have undergone the similar processes.
This project has two core aims: 1. To provide policymakers with reliable and objective analysis concern-
ing the benefits of European Union membership across a wide variety of economic indicators, and 2. To
forecast the economic benefits of European Union membership for Georgia. The benefits of European
Union ascension are studied for twelve countries that joined between the years of 2004 and 2007 and
are analyzed in comparison to comparable European countries that have not yet joined. In addition,
a subset of seven of European Union countries which most closely resemble Georgia are analyzed in
comparison to Georgia. A wide variety of economic indicators are studied. All data used comes from
the World Bank, and all analysis is the author’s own. Graphs shown are author’s own unless otherwise
specified. Analysis was conducted in Stata and python using pandas dataframe.
4
Executive Summary
The study revealed that EU integration is associated with improvements across a variety of economic
indicators for participating countries. Joining the European Union has large positive implications for
trade growth:
● For the twelve countries studied that joined the European Union between 2004 and 2007, trade
(as a percentage of GDP) has grown more than 33 percent since 2000. For the non-EU Eastern
Partnership countries studied, including Georgia, trade has only grown 2 percent since 2000.
European Union integration promotes innovation and creates jobs:
● Since joining the European Union in 2004, new member countries have seen a 40.1 percent
increase in expenditure on research and development, while non-EU Eastern Partnership coun-
tries have seen a 16.9 percent decrease in expenditure. The EU estimates that by investing
3 percent of GDP annually into research and development, 3.7 million jobs will be created.
European Union integration helps lower unemployment rates in its member countries:
● In the four years after joining the European Union, new member states on average
saw a decrease in total unemployment rate from 10.1 percent to 6.1 percent. Over this
same time period, Georgia’s unemployment rate increased from 12.6 to 16.5 percent.
European Union membership stimulates foreign investment:
● In the four years after joining the European Union, new member states saw foreign direct invest-
ment inflows increase from 15.9 percent of GDP to 50.1 percent of GDP. During this time, non-
EU Eastern Partnership countries saw a decrease in foreign direct investment inflows from 13.3
percent of GDP to 10.5 percent of GDP.
Joining the European Union helps to create a more sustainable “green” economy:
● Since joining the European Union in 2004, renewable energy consumption among new member
states has increased an average of 56.9 percent. Over the same time period, Georgia’s renew-
able energy consumption decreased by 47.4 percent.
5
Introduction
Georgia has significantly reformed both its governance and its economic policy within past 15 years.
The country moved from a “near-failed state in 2003” to a “well-functioning market economy in 2014.”1
In 2007, the World Bank called Georgia “the world’s number one economic reformer” after it had, in a
single year, improved its rank of 112th to 18th in the World Bank’s “ease of doing business” index. As
of 2018, Georgia is ranked 8th.
In 2003, GDP per capita in the state was $928.01. By 2016, it had risen to $3,853.65. This growth is
often attributed to widespread privatization, and government free-market oriented policies of low regu-
lation and low taxes, and a governmental effort to curb low-level corruption.
Despite the improvements, there is still much work to be done to improve the social and economic
development of Georgia. In 2014, the Georgian government published “Georgia 2020,” a guide to the
government’s goals to improve the country’s economic well-being across a variety of institutional and
economics areas. At a broad level, the overall strategy of the country for economic development centers
around ensuring the necessary conditions for a free and healthy private sector operating under an “opti-
mal, efficient and transparent government.”2 The role of the government looking forward is to ensure the
successful operation of the free market by enforcing property rights, creating a state where the private
sector, combined with minimal but optimal intervention by the state, will drive the country’s growth.
The government established three core areas to target in order to facilitate Georgia’s growth:
1. Increasing Private Sector Competitiveness;

2. Developing Human Capital;
3. Increasing Access to Finance.
Part of the country’s development plan involves greater integration with international markets – espe-
cially European ones – as well as growth in exports. Georgia’s plans are undoubtedly ambitious.
The purpose of this research paper is to show that if Georgia hopes to achieve the long-term growth and
prosperity it wants, continuing European approximation is imperative, while final membership is also
important. On one level, this paper will focus on the ways in which Georgia’s approximation and EU
ascension can aid in the growth of these three aforementioned areas; and on another level, it will focus
more broadly on a range of economic indicators for which EU ascension has shown to have a significant
and positive effect on countries similar to Georgia that have recently joined.
The purpose of this research paper is to outline the economic effects that EU ascension has had on
countries that joined between the years of 2004 and 2007. The remainder of the paper is devoted to
explaining the methodology behind the analysis of the economic effects of EU ascension, and then
considering the ways in which Georgia can stand to benefit economically by approximation with the EU.
By investigating the economic impacts of EU ascension on a variety of economic indicators, it becomes
clear that EU approximation is important for Georgia if it hopes to achieve the development of the pri-
vate sector and international integration that it is seeking.
1
U.S. Department of State, “Executive Summary, Georgia,” 1.
2 Government of Georgia, “Georgia 2020,” 4.
6
Methodology
Fundamentally, the purpose of the analysis in this project is to show the ways in which EU ascension
has benefitted EU countries economically. The method of analysis used is a type of regression called a
difference-in-differences regression3.
Analysis of the Indicators

For the first few years after Georgia formed a market-based economic system, the country’s situation
was severe. Conflict with Russia in the Abkhazia and South Ossetia regions, civil unrest, energy and
transport blockades, high crime rates, and severed economic ties – among many other economic fac-
tors – led to economic stagnation and exceptionally high rates of unemployment.4 Despite the strategic
efforts of the state and the reforms carried out since 2000s, unemployment and poverty remain to be
extremely high throughout Georgia. Despite high indicators of economic growth within the certain peri-
od of time – Georgia’s GDP Per Capita grew by an average of 5.81 percent annually between the years
of 2010 and 2016 – GDP per capita growth also slowed from 8.63 percent in 2011 to 2.79 percent in
2016, and socioeconomic conditions for large portions of the country remain unchanged.
According to the Georgian government, Georgian Economic policy is based on three main principles:
1. Ensuring fast and efficient economic growth driven by development of real (production) sector
of the economy, which will resolve economic problems that exist in the country, create jobs and
reduce poverty.
2. Implementation of economic policies that facilitate inclusive economic growth – it envisages uni-
versal involvement of the population in the economic development process (including Diaspora,
migrants, ethnic minorities and other groups), prosperity for each member of society through
economic growth, their social equality and improvement of the living standards of population.
3. Rational use of natural resources, ensuring environmental safety and sustainability and avoid-
ing natural disasters during the process of economic development.
One can see very quickly that the goals for growth concern themselves with sustainable and inclusive
development for all members of the Georgian population. It is growth driven by social equality and en-
vironmental safety, while still conforming to the generalized ideals of the free market. The government
pointed to weak competitiveness of the private sector, weak development of human capital, and limited
access to finances are being critical problems hindering Georgia’s development. Georgia’s growth
plans were categorized into three main areas: Private Sector Competitiveness, Human Capital
Development, and Access to Finance. The remainder of this paper will examine how EU ascension
can be shown to benefit each of these core areas, among others. References to the findings of the spe-
cific analysis conducted will be referred to when relevant. It is important to remember that in the data
that follows, “Eastern Partnership Bloc” refers to the average values for various indicators of the six
non-EU Eastern European Partners – Armenia, Azerbaijan, Belarus, Georgia, Moldova and Ukraine –
and EU countries refers only to select countries that joined the EU between 2004 and 2007 – Bulgaria,
Cyprus, Czech Republic, Estonia Hungary, Latvia, Lithuania, Malta, Poland, Romania, Slovak Republic,
and Slovenia – to isolate the effects that joining had on these economic indicators.
3
Please see the detailed methodology in Annex 1 at the end of the document.
4
7
Private Sector Competitiveness
In “Georgia 2020,” The Georgian government focuses on three core ways to improve private sector
competitiveness: improving the investment and business environment, improving innovation and tech-
nology growth, and facilitating the growth of exports.5 However, growth overall has been slow, and is
hindered by increasing political and security-related uncertainties. Exports are the first focus here.
1. International Trade
It is well known that free trade among member states is one of the European Union’s founding princi-
ples. This trade – with commitments to very low tariff levels and no taxes on imports – is possible due
to the “single market” mechanism of the EU, where the group of states essentially refers to its collective
as a single unit in terms of intra-group travel, work, and exports. Beyond commitment to expanding
trade within its borders, though, the EU is also pro-free trade, with a commitment to trade liberalization
throughout the world. Such policies have led to significant export growth for member states in years
following ascension, which will be discussed shortly.
Georgia also has a commitment to increasing exports and trade. However, past economic policies in
the state have not led to the increased volume or competitiveness of Georgian exports that the state
desired: diversification of exports has been insignificant, and the growth of imports has far exceeded
the growth of exports.6 As of 2016, the level of exports as a percentage of GDP for Georgia was 43.6%,
much lower than the desired level for the country. The Georgian government published the following
goals for growth in exports by 2020:
Source: Georgian Government.
a. Exports
Figure 1.1 displays growth in exports of goods and services as % of GDP for the collection of EU coun-
tries that joined in 2004 (plus Romania) in contrast with the Eastern Partnership, which is comprised of
Armenia, Azerbaijan, Belarus, Georgia, Moldova, and Ukraine.

Despite having similar export levels in 2003, in the years since, the collection of countries that joined
the EU experienced significant growth in exports, eventually reaching export levels of over 75 percent
of GDP in 2016, while export levels in the Eastern Partnership countries have decreased and then stag-
nated. In the years 1994 and beyond, the economic model used in this paper – with a P-value of 0.000,
indicating 99.9% certainty that there was a positive effect (i.e. that the effect was not 0) – estimated that
joining the European Union is associated with export levels in EU countries rising 16.93 percentage
5
“Georgia 2020,” 11.
6
“Georgia 2020,” 9.
8
points above their Eastern Partnership counterparts. When we isolate the export situation just before
ascension and shortly after, the effects of ascension on export levels become even more apparent.
Figure 1.1: Exports as a Percentage of GDP
Exports of Goods and Services (% of GDP)

80
75
70
65
60
55
50
45
40
35
2000 2002 2004 2006 2008 2010 2012 2014 2016
EU Countries Eastern Partnership Bloc
Source: World Bank data
Figure 1.2: Exports as a Percentage of GDP (2002-3, 2006-7)
Exports of Goods and Services (% of GDP)

70
61 62
60
52 52
50 45 47 46 45
40 33
32 31
29
30
20
10
0
2002 2003 2006 2007
EU Countries Eastern Partnership Bloc Georgia
Between the years of 2002 and 2007, average export levels in both Georgia and the Eastern Partner-
ship as a whole saw little to no growth, with the Eastern Partnership maintaining the same average
annual level of exports as percentage of GDP in 2007 as it did in 2002, and Georgia increasing its level
of exports as a percentage of GDP marginally, from 29 to 31 percent. The European Union countries,
however, saw near-immediate growth in export levels, rising from an average of 52 percent of GDP
to an average of 61 percent of GDP, growth of 17.4 percent, between the years of 2003 (immediately
pre-ascension) and 2006 (1-2 years post-ascension) alone. The analysis also estimates with 97.5%
level of confidence that EU ascension is associated with increasing exports as a percentage of GDP
beyond Georgia’s growth. It estimates the effect as being 13.6 percentage points, indicating significant
9
benefits for EU ascension not just beyond the average levels in the Eastern Partnership, but beyond
Georgia as well.
When we look to the overall growth in exports among all three country groups being studied over a
longer period of time, we see that the benefits to exports for European Union countries are not just
consolidated to the years immediately after ascension: the effects are long-lasting.
Figure 1.3: Exports as Percentage of GDP (2003-2015)
Exports (% of GDP)
90
80 76 77
70 61 60
60 52
47 46 46 44 45
50
38 38
40 32 33
30
30
20
10
0
2003 2006 2009 2012 2015
The results shown in Figure 1.3 indicate that while exports as a percentage of GDP have remained
stagnant for the Eastern Partnership from 2003-2015, they have increased by over 48.1% on aver-
age for the collection of countries studied that joined the EU during this time. It is important to
acknowledge that Georgia’s exports have grown since 2009 as well, but it has not been able to
maintain nearly the same pace as the average rate of growth for new European Union countries.
Georgia has an openness to international trade and a commitment to expanding free-trade areas, but
these values can only achieve so much when not part of a larger, more stable, secure, and powerful
collective. However, it is also important to understand the specifics of which goods are affected and
how, which is discussed in the following sections.
Georgia’s exports are currently dominated by raw materials, and rates of market diversification and new
market penetration are low.7 There is hope that the further implementation of EU-Georgia Association
Agreement by Georgia will be enough to increase Georgia’s export potential to its desired levels and
help with integration into European markets. This would be accomplished through full bilateral open-
ness to tariff-free imports from each respective entity, and further development of export-oriented indus-
tries to meet the EU’s technical standards for industrial and agricultural goods. Increase in exports in
these countries are evident. For instance, Georgian export in the EU reached 31% of its overall exports;
however this growth is unsatisfactory and needs further expansion.
The reason given for the low levels of product diversification beyond agricultural exports, according
to the Georgian government, is problems with technological sophistication and innovation, which are
argued to also contribute to inability to reach new markets. Additionally, technical trade barriers harm
the ability to utilize existing trade regimes. The Georgian government argues that “the absence of in-
frastructure necessary for boosting exports causes a lack of awareness of potential export markets on
7
“Georgia 2020,” 18.
10
Georgian products; better trade regimes are necessary for accessing certain markets and inadequate
trade and logistical infrastructure increases the cost of exports.”8 The problem of lacking awareness
about Georgian products could certainly be solved by EU ascension, and trade regimes would largely
cease to exist, especially for European and Central Asian countries included in the free-trade network
of the European Union.
i. Integration with European and Central Asian Markets
Regarding the impact of EU ascension (including that of NATO, as a security mechanism) on the ability
for exports to reach new markets, as well as the ability to overcome trade regimes, look at growth of
merchandise exports to low- and middle-income countries throughout Europe and Central Asia for the
years between 2000 and 2008:
Figure 1.4: Export Integration with European and Asian Markets
Merchandise Exports to Low and Middle

Income Countries in Europe and Central Asia
(% Growth Using 2001 as Base Year)
25
20
15
10
0
1998 2000 2002 2004 2006 2008 2010
-5
As Figure 1.4 shows, for EU countries, merchandise exports to low- and middle- income countries in
Europe and Central Asia were relatively static from years 2000 to 2003 and saw sudden sharp increas-
es starting in 2004 (year of ascension) that continued steadily until 2008. For the Eastern Partnership
countries and Georgia, there was no growth. Using the 1994 to present data, the analysis estimates
with 99.9 percent confidence that joining the EU helped countries increase exports to these areas when
compared to the Eastern Partnership countries studied. It estimates the total effect as a 15.87 percent-
age point increase in exports to these countries more than the Eastern Partnership countries. Addition-
ally, it estimates with 99 percent confidence that joining the EU is connected to an increase in these
merchandise exports beyond Georgia’s growth as well. Here, the analysis estimates that the effect of
joining the EU led to an 11.07 percentage point increase in exports to these areas more than Georgia.
There are various mechanisms to point to for this change. First is the general European Union single
market model which champions free trade both intra-EU and internationally, and the trade infrastructure
that being in the European Union provides. Additionally, the aforementioned explanations of preferential
8
“Georgia 2020,” 18.
11
trade regimes with EU countries, as well as trade facilitation by the EU, are relevant. Trade facilitation
by the EU helps increase infrastructural capability to trade, as it covers areas such as transport, port
management, and security services related to management of imports and exports. In fact, one of the
stated goals of the European Union is to expedite the movement of goods and aid less developed mem-
ber countries in reducing border inefficiencies so they can increase trade levels.
Furthermore, the European Union also has significantly more ability to export to high-income countries.
As of 2016, merchandise exports to high-income countries (as a percentage of total merchan-
dise exports) for Georgia was 31.2 percent, and for the average of the Eastern Partnership, was
39.5 percent. For the average of the European Union Countries studied, merchandise exports to
high-income economics accounted for 77.7 percent of total merchandise exports.
ii. High-technology Exports
The collection of European Union countries, studied in this report, has also been able to maintain a rel-
atively high level of high-technology exports to the rest of the world, while Eastern Partnership countries
have maintained low levels of high-technology exports, and Georgia’s have decreased sharply since 2000.
Figure 1.5: High-technology Exports
High-technology Exports (% of
Manufactured Exports)
16.0
13.9 14.1
14.0
12.0 10.9
10.0
8.0
5.4
6.0
4.0 2.5 2.7
2.0
0.0
2000 2008
EU Countries Eastern Patnership Bloc Countries Georgia
Later on in the paper, there is a section devoted to analyzing specifically how EU approximation and
ascension promotes growth in research expenditure and innovation, both clear pathways through which
countries can achieve technological breakthroughs and increase their production of high technology
goods. For now, we will still focus on high technology goods solely in the context of export levels. In the
analysis, the model predicts with 98.4 percent confidence that EU ascension has a positive relationship
with high-technology export levels when compared to Eastern Partnership Bloc countries; and when
compared to Georgia, predicts the same positive relationship with 99.9 percent confidence. It is easy to
conclude here that high-technology exports have remained at a higher level because the new EU coun-
tries have been able to export to a greater and more diverse selection of countries. Regardless, it is
important to address some possible alternate explanations here. It could be argued that Georgia simply
does not have the sufficient infrastructure for high-technology production, and that could be the cause
for an export market dominated by agricultural goods, but that would not help explain why Georgia had
a much higher share of high-technology exports in 2000 that has since fallen sharply.
12
There is also the argument for brain drain and depletion of productive capacity over the course of the
21st century which also harms production of high-technology goods. It could also be the case simply that
there were much fewer merchandise exports in 2000 in Georgia, which accounts for high-technology
having a higher share, but when we look to the manufacturing exports as a percentage of merchandise
export data, we see that manufactured exports have remained a relatively steady percentage of total
merchandise exports. In 2004 and 2005, manufacturing exports were 37.1 and 40.1 percent of mer-
chandise exports, respectively; in 2015 and 2016, they were 39.6 and 32.2 percent. All this goes to
show that it seems EU ascension has played a role – through providing access to more markets
– for high-technology exports to remain a relevant part of total exports, and that by ascension,
Georgia would be aided in once again increasing this sector of the economy, which it actively
wants to do. In national planning, the Georgian government writes that the country seeks to improve
“competitiveness of local production” and orient “Georgian exports towards more high-tech products.”9
b. Imports
Along with exports, we see comparable growth in imports for EU countries coinciding exactly with the
year they integrated into the EU.
Figure 1.6: Imports as Percentage of GDP
Imports of Goods and Services (% of GDP)

75
70
65
60
55
50
1994 1996 1998 2000 2002 2004 2006 2008 2010
EU Countries Eastern Partnerhsip Bloc
The model predicts with 99.9 percent confidence that joining the EU is associated with an increase
in imports as a percentage of GDP when compared to Eastern Partnership countries. It estimates an
overall effect of a 13.73 percentage point increase in imports. It is clear to see that for the EU coun-
tries, growth was minimal from 1994 to 2003, with levels of imports actually dipping well below Eastern
Partnership levels in 2003, with a sudden and clear surge in imports beginning in 2004, when these
countries joined the EU, and continuing until 2008.
9
“Georgia 2020,” 27.
13
The overall takeaway here is that in the years immediately post 2004 and continuing onward to to-
day, joining the EU led to significant increases in imports, exports, and general European and
Central Asian market integration. If Georgia would like to see its level of exports reach 65 percent
of GDP (remember, the EU average is 77 percent now) and develop more markets throughout
Europe and internationally to export to, it is clear that aspiring to EU integration seems a prom-
ising way to achieve these goals. In the next two subsections, we take a look at the two bigger-picture
indicators at play regarding international trade: External balance, and trade as a percentage of GDP.
c. External Balance on Goods and Services
Despite the best intentions of Georgia’s economic policy, over recent years, the growth of imports has
significantly outpaced the growth of exports, which, according the Georgian government, poses serious
macroeconomic risks for the country’s economy as a whole. Figure 1.7 shows the external balance
on goods and services (as a percentage of GDP) for the twelve EU countries studied, the six Eastern
Partnership countries, and Georgia.
Figure 1.7: External Balance on Goods and Services
External Balance on Goods and Services

(% of GDP)
10
0
2002 2003 2015 2016
-5
-10
-15
-20
Source: World Bank Data
In 2002 and 2003, all three groups studied had negative trade balances. By 2015 and 2016, Georgia
has done little to help this, with its trade balance even more negative than it was fourteen years prior.
As of 2016, the trade balance stood at around -15 percent. The average of the Eastern Partnership
countries has remained somewhat steady at an external balance of about -10 percent of GDP. For the
EU countries, external balance, despite being negative in the years immediately prior to joining, has
ended up at around positive 5 percent of GDP in 2016.
It is also vital to recognize that the EU countries have increased their external balance while simulta-
neously increasing imports greatly, as we saw previously. While imports for the Eastern Partnership
countries have stagnated, and the external balance deficit has persisted, the EU countries were
able to both increase imports and exports significantly after joining, while maintaining export
growth beyond import growth by a large enough amount over time that the external balance
deficit was erased completely; and the countries are, as of now, running an average external
balance surplus.
14
d. Trade as % of GDP
Instead of isolating exports and imports, or analyzing them only in terms of the difference between them
(i.e. external balance on goods and services), it is possibly more useful – in order to get a full under-
standing of the way EU ascension is associated with general growth among all trade-related economic
indicators – to look at how EU ascension has affected trade as a percentage of GDP.
Figure 1.8: Total Trade as Percentage of GDP
Trade (% of GDP)
160.0 148.4
134.8
140.0
120.0 111.2
100.1 99.6 102.4
100.0
80.0
60.0
40.0
20.0
0.0
2000 2008 2016
EU Countries Eastern Partnership Bloc Countries
Trade levels were very close for both country groups in 2000, with the countries that would eventually
join the EU having, on average, 11 percentage points more trade as a percentage of GDP. Figure 1.8
shows that while trade across the non-EU Eastern Partnership countries has remained stagnant since
2000, levels have risen considerably in the 21st century for EU countries. The analysis indicates, when
comparing the EU countries with the Eastern Partnership countries, that joining the EU had a positive
effect on the total trade levels of the countries the joined. The confidence level here is 99.9 percent.
However, the coefficient is more startling: remembering that the coefficient here is equal to the aver-
age amount of trade for EU countries after ascension minus before ascension, minus the same values
for the non-EU Eastern Partnership countries, the coefficient was 30.66, meaning that the regression
estimates that joining the EU is associated with trade growth of 30.66 percentage points more than the
average of comparable countries that did not join the EU. This is a staggering amount that may not
be accurately reflected by Figure 1.8 above. Despite showing that significant growth occurred for EU
countries, it does not isolate specifically that this growth started around the year 2004, when the coun-
tries joined—it indicates instead a steady positive trend throughout all of the 21st century. When we look
at the trends of growth both before and after ascension on a year-to-year basis, the coefficient makes
begins to make much more sense. Figure 1.9 below reflects this.
15
Figure 1.9: Trade (EU vs non-EU Eastern Partnership)
Trade (% of GDP)
160
y = 2.8696x - 5629.9
150 R² = 0.7251
140
Trade (% of GDP)
130
120
110
100
y = -0.2109x + 523.82
R² = 0.0208
90
80
1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018
EU Countries Pre Eastern Bloc Pre EU Countries Post Eastern Bloc Post
Here, “EU Countries Pre” and “Eastern Bloc Pre” refer to trade in the years before EU ascension oc-
curred (i.e. pre-EU). “EU Countries Post” and “Eastern Bloc Post” refer to the years after ascension,
2004 and later. Trend lines were added to each section of data to indicate the growth trends over the
years. As is shown by Figure 1.9, from the years 2000-2003, trade growth was actually much more
promising for the Eastern Partnership countries that did not join the EU, even eclipsing the
eventual EU countries in terms of Trade levels in 2003. However, for the years 2004 to 2016,
growth slowed considerably in these countries, actually trending towards annual decreases in
trade levels. The EU countries, on the other hand, saw an immediate and permanent increase in
Trade growth rates starting in 2004, when they joined the EU. The implication here is that joining
the EU is related to a sudden and clear upward trend in trade levels, while non-EU countries in
the Eastern Partnership were left behind.
Figure 1.10: Trade as Percentage of GDP
Trade (% of GDP)
180
160
140
120
100
80
60
40
20
0
EU Countries Eastern Partnership Georgia
Bloc Countries
1994 2004 2014
16
When Georgia is included in the analysis, it becomes clear that trade as a percentage of GDP has de-
creased significantly since 1994 (when, granted, GDP was very low), and has experienced growth from
2004 to 2014, though not the same growth that the EU countries have. Additionally, in terms of absolute
levels, Georgia’s trade as a percentage of GDP falls significantly below the average levels of the EU
countries here, and is much closer to the average levels of the non-EU Eastern European countries in
the Eastern Partnership.
Overall, the analysis of trade indicates that EU ascension is related to significant trade growth on av-
erage for the countries that have joined, while the Eastern Partnership has not seen the same growth.
Beyond this, joining the EU has led to increased imports, greatly improved external balances on goods
and services, the continued relevance of high-technology exports, and much more prominent eco-
nomic integration with the rest of Europe as well as Central Asia. As Georgia continues to grow and
looks to diminish trade barriers, better utilize both regional and international markets for its goods, and
increase export diversification, it becomes clear that EU approximation and ascension is important to
best achieve these goals in the long-term.
2. Innovation / Research and Development
According to the World Economic Forum’s 2017-2018 Global Competitiveness Report, Georgia ranks
118th out of 137 countries in terms of innovation.10 In Georgia, both government and private sector
spending and research remain low. Limited technological capacity has been discussed as a barrier
to trade integration, but also has greater negative implications for the overall development ability of a
country as well as international competitiveness. In 2014, the World Economic Forum’s “Global Com-
petitiveness Index” ranked Georgia in the following categories:
• Capacity for innovation—118 out of 148 countries

• Company spending on R&D—128 out of 148 countries
• Availability of latest technologies—100 of 148 countries
• Firm-level technology absorption—117 out of 148 countries
Further, the country ranks similarly in terms of Global Innovation Index:
Measure Year Ranking

Transparency International
2017 46 of 180
Corruption Perceptions Index
Heritage Foundation’s Economic
2018 16 of 180
Freedom index
Global Innovation Index 2018 59 of 126
Source: Georgian Government
Although it is clear that Georgia is a country that has reformed greatly in terms of economic freedom
and has also taken large strides to curb corruption, it still lacks in research and innovation. Georgia
has a vested interest in changing this: the country hopes to facilitate research and development by de-
veloping the private sector and includes plans to support applied research by increasing state funding
towards these goals. Georgia also plans to commercialize research and development by strengthening
connections between the private sector and the educational system. Further, the government seeks
to develop the relevant infrastructure such as development agencies and innovation centers, facilitate
the training of a workforce that will be qualified to work in the research and innovation sector, and also
10
“The Global Competitiveness Report 2017-2018,” World Economic Forum, 125.
17
create a monitoring system with results-oriented funding models.11 And, in addition to all of this, the
Georgian government is committed to strengthening the legislative and institutional framework relevant
for protection of intellectual property, which they rightfully deem especially important for innovation.
All of this sounds good, but in the EU, where scientific and technological progress has continually been
promoted, these mechanisms already exist. The Joint Research Centre (JRC) provides independent
scientific and technical support for EU Policies; the European Research Council (ERC) supports “es-
pecially ambitious and novel research;” and the Research Executive Agency (REA) “manages about
how of all EU-funded research grants.”12 Beyond this, according to the EU website, “EU countries are
encouraged to invest 3% of their GDP in R&D by 2020 (1% public funding, 2% private-sector invest-
ment).”13
Figure 2.1: Research and Development Expenditure as Percentage of GDP
Research and Development Expenditure (% of GDP)

1.4
1.2 y = 0.0483x - 96.088

R² = 0.9175
0.8
0.6
y = -0.0137x + 27.983
R² = 0.5912
0.4
0.2
0
1995 2000 2005 2010 2015
EU Countries Pre
Eastern Partnership Bloc Countries Pre
Georgia Pre
EU Countries Post
Eastern Partnership Bloc Countries Post
Looking at the effect of EU ascension on research and development expenditure for the EU countries,
non-EU Eastern Partnership countries, and Georgia, it is apparent that the impact of joining the EU is
profound for this economic indicator. Whereas for the ten years before joining the EU, all three groups
studied experienced low research and development expenditure that trended towards decline, after
integration, the EU countries saw an immediate increase in expenditure on research and development,
with further increases each following year. The Eastern Partnership countries saw no growth in this
indicator, with expenditure levels as a percentage of GDP lower in 2015 than in 1996, and Georgia has
lower expenditure as a percentage of GDP than either of the two country groups.14 The regression
11
“Georgia 2020.”
12
Research & innovation,” europa.eu.
13
“Research & innovation,” europa.eu.
14
Georgia did not report research and development expenditure for years 2006-2012.
18
model estimates that joining the EU led to an increase in research and development spending
of 0.35 percentage points of GDP over Eastern Partnership countries. The confidence level in
this regression was 99.9 percent, meaning there is 99.9 percent confidence that there was a positive
effect. This may not seem like a huge increase, but when research and development expendi-
ture necessarily comprises a small percentage of GDP, the percent changes are massive. Since
2004, the EU countries studied saw a 40.1 percent increase in expenditure on research and de-
velopment as a percentage of GDP, while the non-EU Eastern Partnership countries saw a 16.9
percent decline in expenditure.
The expenditure is not research for the sake of it — there are clear and tangible benefits to having
such commitments to research and innovation. The EU estimates that by investing 3 percent of
GDP annually into research and development, 3.7 million jobs will be created, and the EU’s annu-
al GDP will increase by nearly 800 billion euros.15 Thus, having this commitment to research and
innovation both increases GDP and lowers unemployment as well. In a study on the integration of
the single market for the European Union, the European Commission also found that, “The development
of new technologies is contributing to offset the impact of the barriers to market integration in services.”16
This means that the expenditure on research and innovation also helps to better integrate intra-EU mar-
kets.
This also happens to be related to the main flaw hindering Georgia’ desire to greatly increase its re-
search and innovation capabilities by supporting private sector research with funding and monitoring
services. Despite Georgia’s stated commitment to increasing research and innovation, it is difficult to
do so without being better integrated into worldwide markets. The greatest challenge to Georgia’s plan
to increase its research and innovation ability is its own lack of connection to other markets. This is a
general point about the spread of intellectual capital, but it interesting to see the impacts when looking
at trade of research and development services across EU-28 nations.
Figure 2.2: Cross-border Trade Intensity of EU-28 states in 2014
Source: Eurostat 2014 data, European Union “Single Market Integration and Competitiveness Report,” 2016.
Using a term called “cross-border trade intensity,” which refers to the average of intra-EU imports com-
pared to the total size of the sector, Research and development service comprise the largest proportion
of trade of any service. Thus, the innovation and resulting job growth does not happen solely because
the EU has the necessary infrastructure and interest in funding; it happens because throughout the
entire EU research and development services are able to diffuse and intellectual capital is allowed to
15
“Research & innovation,” europa.eu.
16
European Commission, “Single Market Integration and Competitiveness Report,” 13.
19
spread. Without tapping into this same kind of large market with free flow of intellectual as well as phys-
ical capital, with significant trade of research and development services between states, it seems that
Georgia may be unable to grow its research and development abilities to the levels of countries within
the EU.
Regarding research and innovation more generally, it is clear that joining the EU has led to a pro-
found increase in levels of expenditure for the countries studied; and beyond this, also gives
countries access to a network of intra-EU trade in research and development services that helps
research productivity throughout the entire EU.
3. Improving the Georgian investment and business environment
Georgia currently has bilateral agreements on investment promotion and mutual promotion with 32
countries, and negotiations are underway for deals with 24 more countries. Despite this, levels of in-
ternational investment in Georgia are lower than ideal—this is certainly due at least in part to security
concerns, but irrespective of this, in a democratic and developing country such as Georgia that is com-
mitted to upholding the free market, one would expect much more investment, because returns to cap-
ital are high.17 The Georgian government plans to increase funding for SMEs (small and medium-sized
enterprises), and in the EU, the Executive Agency for Small and Medium-sized Enterprises (EASME),
“manages several EU programmes to help businesses.”18
Figure 2.3: Investment Dynamics in the EU 2000 to 2014: Country Groups
Source: European Union “Single Market Integration and Competitiveness Report,” 2016.
Note: Volume Index, the average investment in 2004 to 2008 equals to 100
17
This point is about the general notion of decreasing returns to capital in a country’s production function; it doesn’t relate to any
specific data.
18
europa.eu
20
As is indicated from the Figure 2.3, which shows average investment levels across EU-28 countries
according to geographic location, EU ascension for Eastern countries coincided exactly with skyrocket-
ing investment levels in these Eastern states. Around the years 2004-5, when many Eastern European
countries (Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovak Repub-
lic, and Slovenia) joined the EU, investment levels increased drastically, eventually peaking at an aver-
age investment level more than 70% higher than investment in the year 2000. This surge in investment
can be due to a few reasons: first, by joining the EU and thus increasing export potential by integrating
with more markets, investment attractiveness increases for countries and opportunities for foreign in-
vestment arise; second, joining the EU and NATO, a large, stable bloc, investments appear safer for
foreign investors; and third, joining the EU involves subscribing to certain regulatory systems and using
institutions that improve a country’s ability to attract investments. However, there are other possible
reasons for the surge in investment in Eastern EU country groups. The issue of reverse causality once
again rises here: it is possible that due to low interest monetary policy choices by the EU and United
States stretching back to the early 21st century (around 2001 to 2003-4) there was a sharp surge in
investment into Eastern European and other developing countries, which could have expedited the pro-
cess of eventual EU integration. The argument then is that since some other factor – like cheap money
abroad – caused this surge in investment that actually led to EU integration, EU integration wasn’t the
cause of the investment surge, but the other way around. The argument against this hypothesis has to
do with timing. As we can see in the graph, the major increases in investment into Eastern European EU
countries begin around 2004-5 and peak in 2007-8, which does not coincide with the years in which the
low interest monetary policy was pursued most aggressively. If the cause of investment was cheaper
money, we would likely see investment surges in the years in which this cheap money was available.
Instead, it seems that these policies led to some noticeable increases in foreign investment, but that
EU integration – through its regulatory systems and institutions – made the investment climate of these
countries much safer and thus more attractive for foreign investors, leading to the peak investment
levels in the years immediately following integration. To emphasize this final point about regulation and
institutional capacity in the EU, look to Figure 2.4, which shows progress among EU-28 countries relat-
ing to the ease of various procedures relevant to starting and maintaining businesses:
Figure 2.4: World Bank Doing Business Scores (EU-28 Weighted Averages)
Source: European Union “Single Market Integration and Competitiveness Report,” 2016.
Since 2010, EU-28 countries have made improvements in ability to trade across borders, resolve for
insolvency, start businesses, get electricity, register property, and protect minority investors. All of these
factors coalesce to make the EU as a whole an entity with a thriving business environment internally
with an excellent ability to trade across borders, all of which help make foreign investment in the EU an
attractive option.
21
a. Foreign Direct Investment
In terms of analysis, it is lucrative to look at the ways in which EU ascension has impacted foreign di-
rect investment, which Georgia actively seeks to increase. The Georgia National Investment Agency
is “implementing an aggressive marketing campaign to encourage more foreign investors to come to
Georgia.”19 The U.S. Department of State finds that FDI in Georgia “Georgia increased dramatically
during the periods of 1997-1998, 2003-2004, and 2006-2008. The first two peaks were connected with
the construction of the Baku–Supsa and Baku-Tbilisi-Ceyhan oil pipelines that bring Caspian oil and
gas to European markets. FDI inflows in 2006-2007 hit historic highs due to the privatization of many
state-owned enterprises and the impact of economic reforms.” However, the 2008 conflict with Russia
“undermined investor confidence and the subsequent global financial crisis further restricted FDI. 2008
and 2009 saw sharp decreases in FDI.”20 Part of this is to emphasize that when operating largely as
a single, small state, the amount of foreign direct investment received year to year can be extremely
volatile, because investor confidence is, as a whole, lower.
From 1994 to 2004, the non-EU Eastern Partnership countries and the eventual EU countries had com-
parable rates of foreign direct investment inflows and outflows as a percentage of GDP. In 2003, both
net inflows and outflows were higher, on average, in the Eastern Partnership countries.

Figure 2.5: Foreign Direct Investment Inflows and Outflows
Foreign Direct Investment, Inflows and Ou�lows, % of

GDP
60
50
40
FDI (% of GDP)
30
20
10
0
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
EU Countries (Inflow) Eastern Partnership Bloc (Inflow)

EU Countries (Ou�low) Eastern Partnership Bloc (Ou�low)
Starting in 2004 and continuing until 2007, this picture of foreign investment changed—average for-
eign investment inflows and outflows in the newly made EU countries rose drastically immediately
after ascension, carried by huge increases in foreign investment levels in Hungary, Cyprus and Malta.
The regression model estimates with 94.4 percent confidence that joining the EU is associated with a
positive change in foreign direct investment, net inflows, meaning that the model predicts with a high
level of confidence that joining the EU has had a tangible impact on improving the investment climate
of countries that have joined. For net outflows, the coefficient was not significant.
19
20
22
Georgia was not included in the 1994-present analysis because the country’s data on foreign invest-
ment only extends back to 1997. The regression for 2000-2008 did not return significant indicators for
foreign direct investment in the EU countries vs. Georgia. However, this is because the countries that
Georgia was regressed against were a subset of the EU countries studied that most closely resemble
Georgia. Hungary, Cyprus, and Malta, the three countries that experienced the most FDI growth after
joining the EU, were not included in the analysis with Georgia. If we include them in the analysis, and
regress FDI in Georgia against the full set of twelve EU countries that joined between 2004 and 2007,
the model finds with 99.8 percent confidence that joining the EU did have a positive impact on foreign
direct investment inflows, and the coefficient determined is a 22.3 percentage point increase in foreign
direct investment inflows because of joining the EU. Looking at Figure 2.6 below, this seems evident:
Figure 2.6: Foreign Direct Investment Inflows and Outflows, with Georgia
Foreign Direct Investment Inflows and Ou�lows, % of GDP

60
50
40
FDI (% of GDP)
30
20
10
0
EU Countries Eastern Georgia EU Countries Eastern Georgia
(Inflow) Partnership (Inflow) (Ou�low) Partnership (Ou�low)
-10
Bloc (Inflow) Bloc (Ou�low)
2001 2002 2003 2004 2005 2006 2007
Foreign direct investment inflows in EU countries again can be shown to rise drastically starting in the
year 2004, when these countries joined, while non-EU Eastern Partnership FDI inflows and Georgian
FDI inflows both rose between 2001 and 2007, but not at nearly the same level, and with no clear change
in 2004 as there is for EU countries. The same general analysis can be applied to the net outflow levels.
The outcome of this analysis is to show that joining the EU had a significant and visible impact on levels
of foreign direct investment levels for countries – both inflows and outflows, but especially inflows – and
these benefits, should Georgia join the EU, could be seen as well, once again helping Georgia become
a more internationally integrated economy, which is imperative for long-term growth and development.
Human Capital Development

Human Capital Development was the second main area, after Private Sector Competitiveness, that
the Georgian government stated it will focus on improving. They find that the development of human
resources as well as the efficient use of existing production potential both contribute to comprehensive
economic growth. Of course, growth is necessary to increase the welfare of a country’s citizens, and
Georgia is no exception. However, they also recognize the importance of developing human capital
through social justice, social systems, and healthcare.
23
In terms of general human development, Georgia lags far behind the average of the twelve EU coun-
tries that are studied here:
Figure 2.7: Human Development Index, 1990-2014
Human Development Index (HDI)

0.9
0.85
0.8
0.75
0.7
0.65
0.6
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014
Eastern Partnership Bloc Countries EU Countries Georgia
Human Development Index is a statistic that combines life expectancy, education, and per capita in-
come indicators to create an overall level of human development in a country. Georgia’s HDI is much
closer to the average of the non-EU Eastern Partnership countries, but in recent years, its HDI growth
has exceeded the average growth of its Eastern Partnership counterparts. It is worth noting that in
2004, the average HDI of a country that would join the European Union that year is very close to
what Georgia’s HDI is now, indicating that Georgia is approaching levels of human development
comparable to that of many countries when they joined the EU.
By developing human capital, not only does the country progress in broad terms, but employment
opportunities are created. This isn’t hard to see: by having better capacity in human resources, better
education, and better healthcare, individuals are able to be better qualified to complete productive work
and work longer, helping the development of the country. The next section focuses on the effects the
European Union has on various facets of a country’s workforce.

1. Labor Market
According to U.S. State Department, Georgia offers a substantial supply of both skilled and unskilled
labor “at attractive costs compared not only to Western European and American standards, but also to
Eastern European standards. The labor force is among the best educated and most highly trained in
the former Soviet Union.”21 Despite this, unemployment in Georgia remains high. Although lower than
previous years, Georgia’s unemployment rate in 2017 was 13.9 percent, one of the highest rates in
Eastern Europe. Job creation has remained a significant challenge for the Georgian economy. It seems
easy to conclude that EU ascension would benefit the Georgian workforce in this area simply because
of the increases in exports and general international market integration, as well as the workforce ben-
efits that come with increased research and innovation, but it is important to look at the data showing
the impact that EU ascension had specifically on unemployment rates in the years immediately after
various countries joined.
21
24
a. Employment / Unemployment
Figure 2.8: Employment to Population Ratio
Figure 2.8 shows the employment-to-population ratio of each of the country groups studied. The em-
ployment-to-population ratio refers to the ratio of total number of employed people in an area to the total
number of people fifteen years or older in that area. As we can see, from the period of 2000 to 2008,
once again with “Pre” and “Post” designations to isolate trends before and after EU ascension, we find
that the employment-to-population ratio in the non-EU Eastern Partnership bloc has been largely static,
while Georgia has actually saw significant decreases in this ratio over the eight years. The EU countries
studied saw similar to stagnation to the Eastern Partnership from the years 2000 to 2004, but then ex-
perienced steady growth in employment each of the years 2005 and later. The R-squared value for the
“EU Countries Post” data here is .96, indicating that the data fits this model exceptionally well. Using
the 2000 to 2008 data above, the regression model estimates with 99 percent confidence that EU as-
cension when compared to Georgia, has led to a 6.37 percentage point increase in employment. Figure
2.8 is very telling regarding the positive effects that joining the EU has on overall employment levels of
a country, but it still leaves some questions unanswered. For example, it is possible that more Georgian
citizens pursue higher education and thus are not actively seeking employment. To examine this further,
we will now look to how EU integration affects levels of unemployment, where the calculations are not
based on population, but on labor force.
25
Figure 2.9: Total Unemployment
Total Unemployment (% of Labor Force)

18.0 16.5
16.0 15.0
14.0 12.6
Unemployment Rate 12.0 10.5
11.5
10.1
10.0 8.4 8.5 8.2
8.0
8.0 6.1 6.4
6.0
4.0
2.0
0.0
2004 2008 2012 2017
EU Countries Eastern Partnership Bloc Countries Georgia
Starting in 2004 and continuing to the present, Georgia has maintained a higher unemployment rate
than either the average values of the European Union countries or the non-EU Eastern Partnership
countries. As has been shown consistently throughout the analysis, the values for this economic in-
dicator have remained steady on average for the Eastern Partnership countries, with unemployment
hovering slightly above eight percent. Unemployment for EU countries, on the other hand, fell sharply
immediately after ascension, falling from 10.1 percent to 6.1 percent between 2004 and 2008. Geor-
gia’s unemployment rose from 12.6 to 16.5 percent during this same period, and has since fallen to
11.5 percent, significantly higher than current EU or Eastern Partnership average values. The general
trends are hard to discern here because the global financial crisis that began in 2008-2009 brought up
unemployment rates throughout the world and serves to confound some of the effects that EU ascen-
sion has had. However, it is important to acknowledge that the unemployment rates in the EU – in the
years since the recession – have recovered completely, averaging 6.4 percent in 2017, comparable to
the values in 2008. Thus, Figure 2.9 shows not only the effect of EU ascension on lowering unemploy-
ment, but also indicates that joining the group of more internationally-integrated countries can lead to a
greater resilience with recovering from external economic shocks. According to the European Commis-
sion regarding post-crisis recovery, “The recovery is consolidating in the EU amid increasing political
and international uncertainties. Investment and employment are slowly approaching pre-crisis levels
while trade flows of goods and services in the Single Market continue increasing. Structural reforms are
contributing to improve the performance of Member States, especially in countries that needed those
most.”22 Such is a general facet of the EU’s single market mechanism—by involving a conglomeration
of interconnected states, the single market is more resilient to crises and more competitive than an indi-
vidual country, and more able to absorb asymmetric shocks. Thus, the benefits for Georgia’s ascension
extend beyond improving values of these economic indicators, but also achieving greater stability for
them.
Using the post-1994 regression analysis, the model predicts with 98 percent confidence that when com-
pared to unemployment rates in the Eastern Partnership, joining the EU helped lower unemployment
rates. The coefficient estimate here is -2.05, indicating that EU ascension led to a 2.05 percentage point
decrease in unemployment beyond what the Eastern Partnership was able to achieve. When com-
pared to Georgia, the model predicts with 99.7 percent confidence that joining the EU helped
these countries lower unemployment rates beyond what Georgia was able to accomplish. The
coefficient here is much larger—a 4.89 percent decrease in unemployment rates related to EU
ascension.
22
European Commission, “Single Market Integration and Competitiveness Report,” 5.
26
As astonishing as these numbers are, the effect becomes even more pronounced when we look to
the second regression analysis which spanned years 2000 to 2008, focusing on the more immediate
impacts of EU integration.
Figure 2.10: Unemployment (EU vs. Georgia)
Total Unemployment (% of Total Labor Force)

18
16 y = 0.768x - 1526.7
R² = 0.4532
14 y = 0.395x - 779.05
R² = 0.571
Unemployment Rate
12
10 y = -0.3442x + 699.87
R² = 0.8645
8
6 y = -1.0996x + 2213.7
R² = 0.9387
4
0
1998 2000 2002 2004 2006 2008 2010
EU Countries Pre Georgia Pre EU Countries Post Georgia Post
When data is restricted to 2000 to 2008 (and thus the global economic crisis is taken out as a confound-
ing factor) we see immediate benefits in terms of unemployment reduction related to joining the EU.
As we can see, in 2000, Georgia’s unemployment rate was actually lower than the average rate of the
twelve EU countries studied here. From 2000 to 2004, Georgia’s unemployment rate was on a slight
upward trend while the EU countries were on a slight downward trend. However, starting in 2004, when
these countries joined the EU, there was a sudden and drastic change in the trend towards decreasing
unemployment. The R-squared value here, 0.94, once again very high, indicates that this sudden sharp
increase in the rate of unemployment reduction continued consistently for each year from 2004 to 2008
following EU integration. The regression analysis here estimates with 99.9 percent confidence that
joining the EU led to a decrease in unemployment beyond what Georgia was able to achieve. Beyond
this, the estimated coefficient for the amount of unemployment reduction is 9.1 percentage points—
while Georgia’s unemployment rose severely, the EU countries saw even greater decreases. Such a
decrease is not surprising given the immediate effects that EU integration has had on export levels,
foreign investment, and research and development expenditure – all of which create jobs – but it is still
surprising to see just how clear this effect is on unemployment levels.
b. Labor Mobility
In the European Commission’s 2016 “Single Market Integration and Competitiveness Report,” they
suggest that labor mobility in the EU has grown in significance in the past decade and was an important
adjustment mechanism during the recent global economic crisis.23 They argue that “undoubtedly, the
size of labor mobility and its capacity in helping the economy and labor markets to adjust to asymmet-
23
“Single Market Integration and Competitiveness Report,” 37.
27
ric shocks have increased in the EU.” Thus, the free movement of labor that EU integration allows is
a way of protecting workers against asymmetric external economic shocks. They also state that labor
migration has had a positive influence on labor force growth in countries with higher labor productivity,
and that high-skilled workers are more likely to move to new markets for work than low-skilled workers.
Since border controls between EU countries have been abolished, and since every EU country must
treat EU citizens in exactly the same way that it treats its own citizens regarding taxes, employment,
and social security, the ability for labor to move freely throughout the EU has led to huge net benefits
in terms of development of its countries, decreases in unemployment, and growth in productivity due
to labor reallocation across sectors. EU integration would thus expose the Georgian economy to an
opportunity for unprecedented growth in productivity, as well as give the Georgian people far more em-
ployment opportunities than previously available.
c. Income Inequality
Figure 2.11: Gini Coefficient
GINI Coefficient (EU Countries vs.

Georgia)
50
40.1
40 36.7 36.5
34
Gini Coefficient
30.5 28.3
30
20
10
0
2003 2010 2016
EU Countries Georgia
In terms of income inequality, Georgia is one of the most unequal states in Europe. Income in-
equality has, on average, been decreasing in both the European Union countries and the East-
ern Partnership countries, and both groups now have average levels of Gini coefficients below
0.3. The regression analysis for EU countries vs. Georgia did not show that there was a clear
association between joining the EU on reductions of the Gini coefficient, but it regardless im-
portant to know that, one average, recently-ascended EU countries have lower Gini coefficients
than Georgia, and that income inequality has been decreasing more steadily in these countries
than in Georgia.
d. Social Policy
Undoubtedly, the benefits to employment that EU integration has provided is most attributable to the
aforementioned increases in research and innovation, export growth, and creation of more attractive
business climates. It is also important, though, to mention how social policy in the EU also helps achieve
goals of full employment, stability, and growth.
First and foremost, the EU states that responsibility for social policy lies primarily with national govern-
ments, with the EU supporting and complementing these efforts. This being said, the EU writes that
their employment and social policy is created to:
28
● ease the transition from school to work
● make it easier to find a job
● modernize social security systems
● make it easier for workers to move freely around the EU
● alleviate poverty
● protect people with disabilities
The EU also:
● coordinates & monitors national policies
● encourages member countries to share best practices on social inclusion, poverty & pensions
● supports training, skills development & entrepreneurship
● makes laws on workers’ rights, discrimination at work & coordination of social security schemes,
and monitors their implementation.24
Through modernization of social security, open intra-EU borders, efforts towards poverty alleviation,
training and skill development programs, and other efforts, EU integration would benefit Georgia’s
workers and help to stabilize – as well as decrease – unemployment rates.
2. Improving the health of Georgian citizens

The EU’s social policy does not only affect labor outcomes for its citizens. It also is a relevant factor
in promoting health. When discussing the barriers to health improvement in Georgia, the main issues
addressed are: 1. Shortcomings in the country’s healthcare funding system, and 2. Incorrect regulation
of medical services.
The EU also has extensive legislation in place to contain outbreaks of animal diseases. Animals can be
moved freely throughout the EU, and the EU has mechanisms in place to act on outbreaks in a timely
manner.25 These mechanisms include a warning system to protect people from shipments of high-risk
foods, traceability of production chains, and the basis of all decisions on a precautionary principle—
trying to limit potential food dangers before they have a chance to harm. One would think that with
legislation like this it would hinder agricultural exports for countries that join the EU – simply through
the burden of abiding by regulation – but this is not the case. In the regression model, the analysis of
agricultural exports was conducted for both Georgia and the Eastern Partnership for the 1994-present
time period and the 2000-2008 time period. None of the analysis showed with any significance that EU
integration caused agricultural exports to decrease, and the lowest P-value of the four analyses was
0.442. If Georgians are worried that EU integration will harm agricultural exports, it seems as though
these fears are misplaced.
Aside from regulations on food safety that contribute to overall health, The EU is also committed to in-
clusive, high-quality healthcare for all citizens, and supports research into new health technology. Their
“Third Health Program” has a budget of 449.4 million euros, and serves four objectives:
1. Promote health, prevent disease and foster healthy lifestyles through ‹health in all policies›,
2. Protect EU citizens from serious cross-border health threats
3. Contribute to innovative, efficient and sustainable health systems
4. Facilitate access to high quality, safe healthcare for EU citizens.26
Within these objectives, some of the specific actions the EU has engaged in have been to create EU-
wide standards for health products and services, identifying best practices (like disease management
and health promotion activities) as well as providing funding for health projects. According to the EU
website, the EU is set to spend nearly 7.5 billion euros between 2014 and 2020 on research to improve
European healthcare.
24
“Employment and social affairs,” europa.eu
25
“Food Safety in the EU,” europa.eu
26
“EU Health Programme,” europa.eu.
29
a. Life Expectancy
While all of these programs sound like important factors that could help contribute to the goal of increas-
ing the health of EU nations, it is also necessary to look beyond the ideologies and into the actual data,
to ensure that the policies the EU has enacted and the health guidelines it has implemented have had
a true positive effect. To get a sense for the health of EU countries over time, the following graphs in
Figure 2.12 show average life expectancy by year for males and females for the group of EU countries
vs. Georgia.
Figure 2.12: Life Expectancy, Male and Female
Life Expectancy, Male (Years) Life Expectancy, Female (Years)

75 82
74 81
73 80
72 79
71 78
70 77
69 76
68 75
2000 2005 2010 2015 2020 2000 2005 2010 2015 2020
EU Countries (Male) Georgia (Male) EU Countries (Female) Georgia (Female)
Figure 2.12 reflects that life expectancy for both males and females – though males especially
– has been growing more quickly since 2005 for new EU countries than it has for Georgia. The
economic model predicts with 95.6 percent confidence that EU integration has positively influenced life
expectancy for males beyond Georgia’s male life expectancy; and for females, the model predicts the
same with 98.7 percent confidence.
While the graphs above do show different rates of life expectancy growth for EU countries vs. Georgia
over the past sixteen years, they do not tell the full story. Before EU integration, life expectancy growth
had largely stagnated in these twelve countries, similar to how it has stagnated in Georgia. In the collec-
tion of EU countries, life expectancy of males only increased 3.15 years between the years of 1966 and
2004. However, between the years of 2005 and 2016, life expectancy increased 3.26 years — a greater
increase in life expectancy in 11 years after joining the EU than in the 38 years that preceded it. It
would be difficult to argue that this increase in life expectancy is solely due to European Union
integration, and certainly here there are a multitude of factors in action. However, the increases
in life expectancy for these new EU countries in the years after ascension are somewhat drastic
when compared to the previous 38 years, and this should be noted. The EU’s emphasis on access
to healthcare, disease prevention, and promoting health lifestyles (which include encouraging exercise
and trying to lower rates of recreational smoking) seem to have had at least some positive effect on
health outcomes for its citizens.
30
Other Macroeconomic Impacts
In describing its overall progress goals for a number of economic indicators, the Georgian government
published the following table for what it would like to achieve by 2020:
Source: Georgian Government
While this report has looked at some of the clearest indicators regarding economic wellbeing, employ-
ment, and health, there are other macroeconomic indicators important to address as well. EU integra-
tion has already been shown to reduce unemployment and increase exports of goods and services, so
the following section will focus on the European Union’s effect on other mentioned indicators, namely:
current account deficit and domestic savings.
1. Current Account Deficit
Georgia currently sustains a high current account deficit, which poses a macroeconomic vulnerability
for the country. The government estimates that because of the deficit, net external obligations equal
almost 100 percent of GDP.27 The government states that the high deficit and need for external refinanc-
ing (if there is a sudden change of capital inflows into the country) both increase its general economic
vulnerability. Because of this, Georgia aspires to decrease its current account deficit in the future, hope-
fully achieving a deficit of 6 percent of GDP by 2020, with further reductions later on.
Georgia’s main plan to reduce current account deficit involves signing free trade deals and expanding
exports, which, as we know, EU integration helps greatly. If greater export integration is a method of
achieving reductions in current account deficit, we can expect that EU countries will, on average, run
lower current account deficits than comparable non-EU countries. The following graph (Figure 3.1)
shows current account balances of the twelve recent EU countries, the Eastern Partnership, and Geor-
gia for years 2002-2003 (immediately pre-integration) and 2015-2016 (the most recent data available):
27
“Georgia 2020,” 14.
31
Figure 3.1: Current Account Balance
Current Account Balance (% of GDP)

4
0
2002 2003 2015 2016
-2
-4
-6
-8
-10
-12
-14
As is shown by Figure 3.1, not only have countries – after joining the EU – been able to reduce their
current account balance over the years, they have actually been able to, on average, turn this current
account deficit into a surplus. The model using post-1994 data predicts with 97.8 percent confidence
that EU integration is related to increases in current account balance when compared to Georgia. The
coefficient is 5.79, predicting a 5.79 percentage point total increase in current account balance over
time due to joining the EU.
Aside from large scale reductions in current account deficit as a result of joining the EU – due in large
part the aforementioned large increases in exports – macroeconomic vulnerability is also an important
factor to consider when comparing Georgia’s position to that of countries that joined the EU. Georgia
recognized that its own current account balance is subject to uncertain sources of capital inflows and
external shocks and seeks to add more stable sources of financing such as foreign direct investment
and donor financing. Looking to growth over time, we can see that since 2009, current account balance
has been steady, with consistent increases, while Georgia’s current account balance has been volatile.
Figure 3.2: Current Account Balance (2002-2016)
Current Account Balance (% of GDP)

5
-5
-10
-15
-20
-25
32
2. Access to Finance
According to the 2017 World Economic Forum Executive Opinion Survey, access to financing was the
second most problematic factor for doing business in Georgia.28 Further, the World Economic Forum’s
2017-2018 “Global Competitiveness Report” ranks Georgia 92nd out of 137 countries in terms of avail-
ability of financial services. In terms of ability to get financing through local equity markets, Georgia
ranks 131st. While the Georgian government recognizes that access of finance is crucial for business
development and expansion of exports, it says that the main barrier in this area is that national savings
in Georgia are low and insufficient for investments.29 They estimate that in order to achieve sustain-
able economic growth, they must increase domestic savings levels. They reference that bank
deposits – an important source of savings – were 38 percent of GDP in Latvia, 56 percent in Es-
tonia, and 67 percent in the Czech Republic (all EU countries), while only 24 percent in Georgia.
a. Gross Domestic Savings
The same Global Competitiveness reports ranks Georgia 80th out of 137 countries in terms of Gross
domestic savings. By 2020, Georgia aims to reach 25-28 percent domestic savings as a percentage of
GDP.
Using both 2000 to 2008 data and post-1994 data, the regressions estimate with 99.9 percent
confidence for both Gross savings (% of GDP) and Gross savings (% of GNI) that EU ascension
is related to increases in national savings rates when compared to Georgia—here, showing that
EU ascension promotes stability at a healthy level of national savings that encourages growth,
while Georgia’s savings rates have been fraught with instability, a hindrance to development.
Figure 3.3: Gross Domestic Savings
Gross Domes�c Savings (% of GDP)

30
25
20
15
10
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
-5
-10
This is not an indicator for which we would expect EU ascension to lead to sudden growth, because
as important as gross domestic savings are, savings rates that are too high may indicate insufficient
economy-wide consumption. On one hand, we can see that EU countries have, over time, maintained
higher levels of savings than Georgia. However, more importantly, we can see that EU countries
28
“The Global Competitiveness Report 2017-2018,” 124.
29
“Georgia 2020,” 56.
33
have experienced and maintained stability in domestic savings rates – even during times of
international economic crisis – since joining the EU, while Georgia has experienced immense
volatility, dipping especially low during the 2008-2009 recession, which coincides also with the
Russo-Georgian war. Figure 3.4 further emphasizes the historical instability of Georgian saving.
Figure 3.4: Gross Domestic Savings
Gross Domes�c Savings (% of GDP)

30
25
20
15
10
5
0
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
-5
-10
-15
This is not to say that the only path to increased domestic savings is through EU ascension, but instead
to show that it is one route. Normalization of state finance combined with improved efficiency through
coordinated economic policy within EU states could have a profound effect not only on the level of
Georgia’s gross domestic savings, but on the stability of gross domestic savings as well.
34
Energy and Environmental Impact
The final set of indicators analyzed in this research concern themselves with the EU’s role in altering
the energy sector and the environmental impact of its constituent countries.
1. Energy Imports
As a way of promoting stable growth and self-sufficiency, Georgia has stated that one of its main goals
in the energy sector is to reduce energy imports and increase energy independence. Looking to how
energy imports have changed over time for ascended EU countries vs. Georgia, we see the following:
Figure 4.1: Energy Imports
Energy Imports, Net (% of Total Energy Use)

80.0
68.8
70.0
61.7
60.0 53.7
51.4 49.9 48.8
50.0
40.0
30.0
20.0
10.0
0.0
2004 2009 2014
While Georgia saw large increases in energy imports from 2004 to 2014 – rising 28.2 percent
over that time – the EU countries, conversely, saw slight decreases in reliance on energy im-
ports. It is evident, then, that these EU countries on average are more self-sufficient than Geor-
gia regarding total energy use, but it is perhaps more important to investigate the cause of this
self-sufficiency—i.e. the types of energy that are being consumed by these countries.
2. Renewable Energy Consumption
The EU’s guidelines for growth are “sustainable development based on balanced economic growth and
price stability, a highly competitive market economy with full employment and social progress, and envi-
ronmental protection.”30 Georgia seeks to adopt a similar framework: the government has stated that they
will encourage foreign direct investment oriented towards environmentally-friendly and resource-saving
technologies that will lead to the creation of a “green” economy. Relating to a “green” economy, the EU
states on their website that “Tackling climate change now can save human and economic costs in the
longer term. Growing demand for clean technologies also offers opportunities to modernize Europe’s
economy, creating ‘green’ growth and jobs.”31 It is evident that both Georgia and the European Union as
a whole both understand that promoting clean growth going forward is a necessity, and that the environ-
mental impact of development must be taken into consideration before implementing any policy.
30
“The EU in Brief,” europa.eu
31
“Climate action,” europa.eu
35
From an international global warming mitigation perspective, the importance of green growth is al-
ready apparent. However, Georgia’s interest in considering the environmental impact of development
extends beyond the international consequences, due to the fact that it “is one of the most sensitive
places among the world’s mountainous regions in terms of natural disasters.”32 Thus, conducting prop-
er assessments of the environmental impact of development must be noted, which includes looking to
modernize Georgia’s economy to promote growth in renewables and green technology.
Figure 4.2: Renewable Energy Consumption
Renewable Energy Consump�on (% of Total Final

Energy Consump�on)
20
18
16
14
12
10
8
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
EU Countries Eastern Partnerhsip Bloc Countries
Figure 4.2 evinces what seems by now to be a common trend for economic indicators throughout this
analysis: whereas before EU ascension, the Eastern Partnership actually had, on average, higher lev-
els of the indicator in question (in this case, consumption of renewable energy); after the EU countries
integrated in 2004, this trend reversed. By 2005 the new EU countries already had higher renewable
energy consumption than the non-EU Eastern Partnership states, and by 2015, had achieved on
average nearly 20 percent renewable energy use, compared to stagnation in the Eastern Part-
nership between levels of 10 and 12 percent. Such an increase in renewable use is not just random
chance: the EU has specified the exact energy targets they hope to achieve by 2020 and 2030:
Targets for 2020:

− Reducing greenhouse gases by at least 20% compared to 1990 levels
− 20% of energy from renewable sources
− 20% energy efficiency improvement
Targets for 2030:

− 40% reduction in greenhouse gas emissions
− At least 27% EU energy from renewables
− Increase energy efficiency by 27-30%33
Given that renewable use in this subset of EU countries is already nearing 20 percent as of 2015, it
seems as though the EU will reach its goals. To get a more comprehensive understanding of how re-
32
“Georgia 2020,” 38.
33
“2020 climate & energy package,” europa.eu
36
newable energy consumption is prioritized in the EU, the following graph (Figure 4.3) shows the growth
trends using 2004 as a base year. Instead of looking at aggregate levels of renewable energy con-
sumption across years, Figure 4.3 instead indicates how renewable energy consumption has changed
across years for the subset of EU countries, the non-EU Eastern Partnership countries, and Georgia.

Figure 4.3: Renewable Energy Consumption Growth since 2004
Renewable Energy Consump�on Growth Using 2004 as

Base Year
(% of Total Energy Consump�on)
80
Percent Growth Over 2004 Levels
60
40
20
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
-20
-40
-60
Year
In the 1994 to present regression, the model predicts with 98.1 percent confidence that EU inte-
gration is associated with an increase in renewable energy consumption beyond the countries
in the Eastern Partnership. When compared to Georgia, the model’s prediction rises to a confidence
level of 99.9 percent that EU ascension is connected with an increase in use of renewable energy beyond
Georgia’s. The regression estimates that joining the EU led to countries being able to grow their use of
renewable energy by 17.72 percentage points beyond Georgia’s growth over the same time period. Look-
ing at Figure 4.3 above, this estimation does not seem surprising. It is important to note that Georgia has
much greater consumption of renewable energy than either the EU average of the Eastern Partnership
Bloc Average. Georgia’s current consumption of renewable energy is 28.66% of total final energy con-
sumption, while the EU average is 18.98%. However, looking at the changes that have occurred since
2004 (when the EU countries included in analysis ascended) we find that renewable energy consumption
has increased 56.88%, while Georgia’s renewable energy consumption has decreased by 47.44%.
Conclusion
The preceding analysis has concerned itself with some of the most salient economic indicators for
which EU ascension has had a positive and significant impact on its constituent countries, but it was
not an exhaustive list.
Joining the European Union is associated with large-scale and often immediate economic changes
for – along with many other indicators – international trade, employment, debt stabilization, and use of
renewable energy. If Georgia hopes to achieve long-term steady, stable, and comprehensive growth
through increased private sector competitiveness in the future, as well as security and employment for
its people, full integration and, ultimately, ascension into the European Union must maintain itself as a
top priority for the country.
37
Annex
The regression was set up as follows:
Yindicator = β0 + β1Treatment + β 2Post + β3Treatment*Post + e
This regression is used because it attempts to isolate the effect of EU ascension on the economic
indicators studied here. I will explain each variable briefly and then explain what each variable used at-
tempts to capture in the analysis. Each variable here is a dummy variable that is set to 1 when true and
set to 0 when false. This, in effect, means that the effect of these variables is “turned on” only when they
are true. The variable “Treatment” represents the treatment group. The treatment group in this analysis
is the collection of countries that joined the EU, so for each of these countries, the treatment variable is
set to 1, and for all non-EU countries studied, the variable is set to 0. The variable “Post” refers to the
year in which the economic indicator is being analyzed. For all countries studied, the variable “Post” is
set to 0 for all years 2004 or before (the year these countries joined the EU) and is set to 1 for all years
2005 and after. It should be noted that for Romania, which joined the EU in 2007, the variable “Post” is
set to 1 starting in 2008. The final variable is “Treatment*Post”, which is a dummy variable that is equal
to the values of “Treatment” and “Post” multiplied together. This value is equal to 1 only when both
“Treatment” and “Post” are equal to 1, which means that it is only equal to 1 for countries that joined the
EU in the years after they joined the EU.
The overall way by which this analysis works is to show how EU countries benefitted from joining the
EU by comparing them to countries that did not join the EU. What do the variables mean, then? The de-
pendent variable, Y, refers to the economic indicator we are looking at. The variable “Treatment” refers
to the inherent differences between EU countries studied and non-EU countries studied. For example,
EU countries generally have higher GDPs than non-EU countries, but because this is not something
that can be attributed to joining the EU, because these GDP differences existed long before 2004. This
is what the variable “Treatment” accounts for. The variable “Post” accounts for changes over time in the
indicators. For example, if for an economic indicator, there was significant growth in EU countries over
time, it might be tempting to say that joining the EU caused this growth. However, if similar growth in
non-EU countries also occurred over that time period, then one cannot reasonably attribute that growth
to EU ascension, and must instead attribute it to something else. The other ways in which growth can
be stimulated over time are accounted for by the “Post” variable. The final variable, “Treatment*Post,”
is the one of interest in this analysis. Since “Treatment” and “Post” account for both inherent differenc-
es between EU and non-EU countries as well as growth over time, “Treatment*Post” accounts for the
changes in economic indicators that can be related specifically to EU ascension. For example, if for
an economic indicator, both EU and non-EU countries grew at comparable rates before 2004, but after
2004, countries that joined the EU experienced much greater growth than non-EU countries, this growth
would then be attributed to joining the EU. The coefficient value created for a given economic indicator
here is as follows:
(YEUpostMean - YEUpreMean) - (YNon-EUpostMean - YNon-EUpreMean)
The coefficient is thus the average value of the economic indicator for EU countries in the years after
ascension minus the average value of the economic indicator for EU countries in the year before ascen-
sion, minus the values for non-EU countries over this same time period. The idea is that if in the years
following ascension, EU countries found new growth in economic indicators that non-EU countries did
not see as well, then joining the EU impacted the growth of these economic indicators. This method of
determining the coefficient – taking the difference in the differences between the two groups over time
– is how this type of regression analysis got its name.
For many of the economic indicators in the dataset I used, the data extended further back for EU coun-
tries than non-EU countries. Because having much more data for certain countries than others could
disrupt the consistency of the data (and also skew the pre-2004 means of economic indicators for these
groups) I decided to analyze the data for two sets of years, where there was readily available data for
38
all countries. The first set of years is of 1994 until the most recent data (which is usually 2016). This
was to get a sense of the overall longer-term effects of EU ascension. The second set of years was of
2000-2008. This set of years was used to get a better understanding of the more immediate economic
impacts of EU ascension.
With these years in mind, I ran the regression for two different groups. The first type of regression was of
EU countries against Eastern Partnership Countries. The second type of regression of was of EU countries
similar to Georgia against Georgia. Put simply, here are the four total regressions I ran:
Regression 1: EU Countries vs Non-EU Eastern Partnership Countries

Years studied: 1994-present
EU Countries Studied: Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta,
Poland, Romania, Slovak Republic, Slovenia
Non-EU Countries Studied: Armenia, Azerbaijan, Belarus, Georgia, Moldova, Ukraine
Regression 2: EU Countries vs Non-EU Eastern Partnership Countries

Years studied: 2000-2008
EU Countries Studied: Bulgaria, Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta,
Poland, Romania, Slovak Republic, Slovenia
Non-EU Countries Studied: Armenia, Azerbaijan, Belarus, Georgia, Moldova, Ukraine
Regression 3: EU Countries vs Georgia

Years studied: 1994-present
EU Countries Studied: Bulgaria, Estonia, Latvia, Lithuania, Poland, Romania, Slovak Republic
Non-EU Countries Studied: Georgia
Regression 4: EU Countries vs Georgia

Years studied: 2000-2008
EU Countries Studied: Bulgaria, Estonia, Latvia, Lithuania, Poland, Romania, Slovak Republic
Non-EU Countries Studied: Georgia
A final note: in the graphs later on in this research paper, where I represent the average value of an
economic indicator for EU Countries, I am using averaged values from the larger subgroup of EU
countries used in the first two regressions.
Results
The regression analysis was conducted for 100 total economic indicators. For the regressions involving
EU countries vs. Eastern Partnership Countries over the time period 2000-2008, the “Treatment*Post”
variable was statistically significant (meaning 95% confidence level or more) for 20 separate economic
indicators. When analyzing the time period 1994-Present, the variable was statistically significant for
61 separate economic indicators. For the analysis of Georgia specifically, for the time period 2000-
2008, “Treatment*Post” was significant at the 95% confidence level for 30 economic indicators. When
evaluating the time period of 1994-Present, the number of significant indicators grew to 40. The results
table is included below.1 These results all point to EU ascension having a profound and positive effect
on the economies of countries that join in the years following ascension. The remainder of this paper is
devoted to investigating the specific indicators that are affected, and what Georgia stands to gain from
EU ascension in the future.
1
In the table, the coefficients refer to the coefficients on “Treatment*Post.” A single asterisk, “*,” is used if the coefficient is signifi-
cant at the 95% confidence level. Two asterisks, “**,” are used to denote significance at the 99% level, and three asterisks, “***,” are
used to denote significance at the 99.9% level.
39
Sanity checks were also performed as part of the analysis. In order to show that the differences in
growth of economic indicators was not random chance, the same analysis was conducted for Non-EU
Countries vs. Georgia. This regression – since the entire subset of countries included has not joined
the EU – should have shown few statistically significant differences in growth of economic indicators
pre- and post- 2004. Indeed this was the case, and the regression turned up very few statistically sig-
nificant indicators. Additionally, we saw graphically that the parallel trend assumption – which assumes
comparable growth for the indicator in question before the change being studied occurs (in this case,
EU ascension) – holds up as well.
Finally, there is the issue of reverse causality which should be addressed. There is an argument that
joining the EU did not cause growth in these economic indicators; but instead that these indicators grew
precisely because these countries were working to meet the economic standards for EU ascension.
This initially seems like it could be a valid argument. However, if it were shown in the data, it would
mean that countries that eventually joined the EU saw growth in these indicators – at the very least – for
a few years before joining the EU, as they worked to improve their economies. As we saw, this is not
the case. For nearly all relevant indicators, we see that the change in the economic indicator coincides
almost exactly with the year or the year after the country in question joined the European Union.
40

An Economic Argument For Georgia's Ascension Into The European Union

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An Economic Argument for

Georgia’s Ascension into

© The Economic Policy Research Center

About this Project...................................................................................................................... 4

Analysis of the Indicators.......................................................................................................... 7

Private Sector Competitiveness........................................................................................ 8

European Union integration promotes innovation and creates jobs:

European Union membership stimulates foreign investment:

1. Increasing Private Sector Competitiveness;

Analysis of the Indicators

Source: Georgian Government.

Figure 1.1: Exports as a Percentage of GDP

Exports of Goods and Services (% of GDP)

EU Countries Eastern Partnership Bloc

Source: World Bank data

Figure 1.2: Exports as a Percentage of GDP (2002-3, 2006-7)

Exports of Goods and Services (% of GDP)

EU Countries Eastern Partnership Bloc Georgia

Source: World Bank data

Figure 1.3: Exports as Percentage of GDP (2003-2015)

EU Countries Eastern Partnership Bloc Georgia

Source: World Bank data

i. Integration with European and Central Asian Markets

Figure 1.4: Export Integration with European and Asian Markets

Merchandise Exports to Low and Middle

EU Countries Eastern Partnership Bloc Georgia

Source: World Bank data

ii. High-technology Exports

Figure 1.5: High-technology Exports

EU Countries Eastern Patnership Bloc Countries Georgia

Source: World Bank data

Figure 1.6: Imports as Percentage of GDP

Imports of Goods and Services (% of GDP)

EU Countries Eastern Partnerhsip Bloc

Source: World Bank data

c. External Balance on Goods and Services

Figure 1.7: External Balance on Goods and Services

External Balance on Goods and Services

EU Countries Eastern Partnership Bloc Georgia

Source: World Bank Data

Figure 1.8: Total Trade as Percentage of GDP

EU Countries Eastern Partnership Bloc Countries

Source: World Bank data

Source: World Bank data

Figure 1.10: Trade as Percentage of GDP

1994 2004 2014

Source: World Bank data

2. Innovation / Research and Development

• Capacity for innovation—118 out of 148 countries

Further, the country ranks similarly in terms of Global Innovation Index:

Measure Year Ranking

Source: Georgian Government

Figure 2.1: Research and Development Expenditure as Percentage of GDP

Research and Development Expenditure (% of GDP)

1.2 y = 0.0483x - 96.088

Source: World Bank data

Figure 2.2: Cross-border Trade Intensity of EU-28 states in 2014

3. Improving the Georgian investment and business environment

Figure 2.3: Investment Dynamics in the EU 2000 to 2014: Country Groups

Figure 2.5: Foreign Direct Investment Inflows and Outflows

Foreign Direct Investment, Inﬂows and Ou�lows, % of

EU Countries (Inﬂow) Eastern Partnership Bloc (Inﬂow)

Source: World Bank data