Georgia Stuck Between Hong Kong and Estonia In Big Mack Index

Georgia Stuck Between Hong Kong and Estonia In Big Mack Index

The FINANCIAL -- Established almost eight years ago, ISET Policy Institute’s Khachapuri Index was inspired by the famous Big Mac Index of The Economist. The Big Mac Index ranks countries on the cost – translated into US dollars – of the Big Mac hamburger sold at local McDonald's restaurants. We rank Georgia’s major cities on the cost of cooking one portion of Imeretian Khachapuri. 

The whole point about the Big Mac Index is that McDonald’s hamburgers are exactly identical regardless of whether they are produced in Georgia, China or the US. They consist of exactly the same ingredients. Moreover, they are produced and sold by workers with roughly the same qualifications. Finally, McDonald’s restaurants use very similar buildings and identical equipment all over the world. 

Now, if everything is identical, we may expect the Big Mac hamburgers to have exactly the same price all over the world (just like iPhone 6s sells for the same price in Georgia and the US). That is not the case, however. The reason the Big Mac Index attracts so much attention is precisely because it takes very different values in different countries: from as little as $1.53 in Moscow, to $6.44 in Switzerland (as of January 2016). 

How can we explain such a large (more than 4-fold) difference in the price McDonald’s hamburgers? Are the Swiss particularly fond of fast food? Have the Russians decided to boycott McDonald’s as a symbol of American imperialism?

The first thing to note is that hamburgers cannot be flown from the US to Georgia (like iPhone 6s). They must be prepared locally. Hamburger prices in Russia and Switzerland may indeed be different because there can be no competition between the (cheap) Russian hamburger producers and their colleagues in Switzerland. 

What this does not explain is why a Swiss-made Big Mac is four times more expensive than its Russian equivalent. 

The answer to that question is mainly about the value of national currencies – the Swiss franc and the Russian ruble in our example – relative to their purchasing power. What the Big Mac Index tells us is that the Swiss franc is overvalued in international currency markets compared to the number of hamburgers (or any other local goods and services) it can buy. By the same token, the Big Mac Index tells us that the Russian ruble is under-valued. The currency markets don’t appreciate the ruble because Russia is politically and economically unstable. 

Georgia’s place on the Big Mac Index. We checked the price of the Big Mac hamburger in the nearest McDonald’s restaurant on Rustaveli and added Georgia to the list of countries covered by the Index. In January 2016, at 2.53 USD per Big Mac burger Georgia ranked between Hong Kong and Estonia. This sounds like a good place to be, however, the more important comparison is with our main trading partners such as Russia and Turkey. 

What the Big Mac Index tell us is that by letting its currency devaluate, Russia has gained a very significant cost advantage over Georgia (and most other countries around the world). This is precisely why Georgia’s exports to Russia, such as mineral water and wine, took a big hit in 2015. This is also why Russian goods (including secondhand cars) are suddenly much more demanded in the Georgian market. 

The good news about Georgia’s position in the Big Mac Index is that the lari is still undervalued relative to other important trade partner countries such as the EU and Turkey. We should have a price advantage when it comes exporting to these markets as long as we are able install the right equipment and instill discipline and motivation in our under-paid workers.