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processes it is confronted with complicated socioeconomic problems and faces difficulties in building a civil society and in meeting the requirements of the new world order. At the present stage of globalization, Georgia is building a European civilization on the basis of its specific national identity and is contributing to the creation of a new system of international relations.
Vakhtang BURDULI
D.Sc. (Econ.), department head at the P. Gugushvili Institute of Economics (Tbilisi, Georgia).
THE ROLE OF GLOBALIZATION IN REVIVING THE ECONOMY OF COUNTRIES IN TRANSITION
(A Case Study of Georgia)
Abstract
The article analyzes the ways globalization is conducive to reviving technology and raising the product competitiveness and economic efficiency of a post-Soviet country (Georgia) during its transition to a market economy. With this goal in mind, the author looks at the reasons for the technological lag and decline in product quality in transition states during the pre-reform period. He goes on to substantiate, based on Professor V. Papava’s “theory of necroeco-nomics during the transition period,” the reasons why a “dead economy” exists during this period and why it gradually dwindles away and disappears completely as market relations develop. He justifies the need to
make use of such globalization factors as the movement of investments, innovations, and knowledge, the formation by transnational corporations in transition countries of enterprises engaged in the mass manufacture of the latest high-tech products, and so on, which is imperative for forming a market economy and raising its competitiveness. In the last section of the article, the author looks at the influence of the country’s active integration into the globalization processes on the increase in domestic goods turnover and product export, as well as on raising the efficiency of the economy and prosperity of the population in a state with a transition economy.
I n t r o d u c t i o n
For several years now, the world has been moving gradually into the era of globalization. This process is primarily reflected in the economy and economic relations in the rapid spread of technolo-
gy1 and knowledge,2 as well as in the exchange of capital, goods, and services based on the comparative advantages of the countries involved.3 The Caspian region should also be part of this process. For example, E. Ismailov and V. Papava note: “...in the globalizing world ... the Caucasus cannot and should not remain isolated from the global integration processes. Nevertheless, we strongly believe that integration into the world economy requires comprehending the intra-regional integration possibilities.”4
As we know, states with transition economies inherit primarily outmoded, compared with advanced market countries, technology (particularly in the consumer sector) from the old system and experience commodity shortages, as well as the low quality of products manufactured by several industries.
After the Soviet Union collapsed, there was a massive breakdown in technological ties (although they were largely obsolete), which aggravated the situation in the economy even more. Professor V. Papava studied the reasons for “necroeconomic enterprises” and the characteristics of the stages of their gradual self-elimination during the canonization of market relations in his “theory of necr-oeconomics during the transition period.” This study also contains recommendations on how to form the institutional and organizational structures of enterprises in keeping with the requirements of a market economy.
The planetary globalization process should promote countries’ accelerated progress toward advanced economic boundaries; in the economic respect, it has significantly enlarged the scope of investment and commodity exchange between states. Therefore, with the appropriate environment, a country is able to incorporate up-to-date technology and innovations into its economy, which makes it possible to increase the turnover of goods and services with other countries.
Non-Economic Distribution as a Factor of Outmoded Technology and Low Product Quality
Globalization in the economy is particularly attractive for post-Soviet states that are lagging behind in technological development due to several negative processes going on in the economy, which had a negative effect on the quality and technological level of the products manufactured by most industries (particularly in the consumer sector). The production of the hydropower and mining industries was distinguished by high quality.5 We should also note the production of several branches of the military-industrial complex, space technology, and certain durable consumer goods, which, of course, like any other high-quality product, were in short supply and very inaccessible.
“Socialism or state-monopoly feudalism”6 with primarily non-economic distribution of benefits7 essentially denies the competitive principles in the economy. As Vladimer Papava notes, “abne-
1 See: V. Burduli, The Coordination of Economic Development at the Regional and Local Levels (A Case Study of Georgia), Meridian, Tbilisi, 2006, p. 171 (in Georgian).
2 See: R. Abesadze, R. Sarchimelia, N. Arevadze, M. Melashvili, Problems of Economic Development and Forecasting, Universal, Tbilisi, 2004, pp. 19-21 (in Georgian).
3 See: V. Papava, The Political Economy of Post-Communist Capitalism and the Economy of Georgia, PDP Publishers, Tbilisi, 2002, p. 156 (in Georgian); G. Joliia, International Economic Relations, Metsniereba Publishers, Tbilisi, 2002, pp. 61-66 (in Georgian).
4 E. Ismailov, V. Papava, The Central Caucasus: Essays on Geopolitical Economy, CA&CC Press® AB, Stockholm, 2006, p. 3.
5 See: V. Papava, op. cit.
6 V.G. Papava, T.A. Beridze, Ocherki politicheskoi ekonomii postkommunisticheskogo kapitalizma (opyt Gruzii), Delo i servis, Moscow, 2005, p. 11.
7 See: V. Burduli, op. cit., p. 13.
gation of competition in a command economy destroyed the only effective stimulus of economic development, which resulted in the manufacture of low-quality products.”8 There were also several non-economic reasons for this. In the Soviet economy, a significant place was occupied by the so-called prison economy, where the compulsory, at times gratuitous labor of prisoners was made active use of—this formed the foundation of many of socialism’s greatest building achievements (the White Sea-Baltic Sea Canal, the Dnieper Hydroelectric Station—DnieproGES, and so on), as well as the rapid restoration of the national economy in the postwar years. In addition, there was a widespread system of “closed” cities and secret enterprises, and highly qualified specialists worked in the strictest isolation. This was conducive to ensuring performance discipline and reaching the set economic and social goals.
However, on the whole, according to Papava’s formulation, “the Soviet economic system was a type of state-monopoly feudalism; since feudal “incentives” actively prevented the introduction of everything new and progressive, such an economic system was fundamentally incapable of ensuring a high level of economic development.”9
Product output based on complex technology requires vast amounts of the means of production—specific parts, accessories, and raw material—which were under central control and strictly allocated with permission from the corresponding state bodies. Since the smooth functioning of enterprises was entirely dependent on the timely allocation of the indicated funds, the directors, as well as the financial and other employees engaged in material-technical provision issues, had to “get a hold” of them in every way they could conceive. This very system gave rise to the first manifestations of corruption, which later acquired enormous proportions. Most of what was manufactured, as the mass media noted at that time, was produced “for the sake of production” (in order to give the workers something to do, fill the storehouses with products, and carry out exchange with related and other enterprises, and so on), that is, there was “production for production’s sake,” rather than for the sake of consumption. For example, the bed of many Siberian rivers is still strewn with unwanted sinkers.
All the shortcomings of the militarized Soviet economy, particularly the low level at which the government supplied the population with consumer goods, and, consequently, the low volume of domestic goods turnover, were also characteristic of the economy of Georgia as a post-Soviet country. As in other republics, the inadequacy of centralized commodity exchange was compensated for by the development of the shadow economy and corruption, the consequences of which are still being overcome today.10
Admittedly, this mechanism was accompanied by the absence of unemployment, but this could most likely have been achieved anyway if well-thought-out measures were developed in economic policy, although it could hardly have raised the product quality or helped to overcome the backwardness in technology, keeping in mind that market competition as such was not observed.
Due to the developed corruption mechanism, even the technology purchased in the West for producing consumer goods—for manufacturing high-quality goods—could not be used reliably in some countries. This is still continuing to a certain extent today. For example, if a foreign enterprise operates in a post-Soviet state, its contract often stipulates that some of the parts will be produced by corresponding local structures, but often the current technological level of the latter makes it impossible to manufacture accessories of the necessary quality.
8 V.G. Papava, T.A. Beridze, op. cit., p. 92.
9 Ibid., pp. 14, 15, 16.
10 See: G. Tsereteli, V. Burduli, “Problemy razvitiia tovarnogo rynka v postsovetskoi Gruzii na fone evoliutsii mi-rovoi ekonomicheskoi sistemy,” Ekonomicheskaia nauka sovremennoi Rossii, No. 4, 1999, p. 90.
The “Necroeconomic” Basis of the Reproduction of Backwardness in Post-Communist Countries
The economy of the post-communist countries is characterized by an underdeveloped material-technical base and uncompetitive production, so the goods they manufacture usually do not meet the demands of a market economy, and they are essentially impossible to sell. This results in overstocking, that is, a large number of products of labor lie around in storehouses as dead stock. This is of immense detriment to the economy, its development is stymied, and it is impossible to integrate the country into the world economy.
Vladimer Papava analyzed the reasons for, essence of, and ways to overcome the consequences of this phenomenon and set them forth in his “theory of necroeconomics during the transition period.” After analyzing the nature and specifics of the processes going on in the post-communist transition economy, Papava comes to the conclusion that almost all the products manufactured in these states are uncompetitive because of their low quality. “There is no market for these products and it can essentially not exist. This kind of economy can be called ‘dead,’ that is, necroeconomic, and the theory for studying it we can call ‘the theory of necroeconomics.’”11
In his works on the “theory of necroeconomics,” the author focuses his main attention on substantiating its nature, studying its components, and looking at the specifics of its manifestation at different stages of the transition period, as well as ways to eliminate the “necroeconomy” and replace it with a competitive economy. In our view, the theory would be even more beneficial if clearer parallels were drawn and a synthesis made with corresponding provisions of the institutional and evolution theories. Although with respect to the latter, it should be noted that under the conditions of an inevitable and sometimes premeditated mass breakdown in the established technological and other production relations (although most of them are “necroeconomic” due to the outmoded technology and products), something akin to a revolutionary overthrow of anachronistic production has occurred (these issues were studied by Vladimer Papava in corresponding works on “necroeconomics”).12
New contemporary production evolved very slowly in Georgia, and only after the Rose Revolution could any noticeable progress in its development be seen in several industries. This applies in particular to the construction and development of infrastructure, including production, since without an up-to-date production structure (finances, roads, power engineering, purification facilities, storehouses, refrigerators, information-communication systems, and so on), there can be no talk of introducing new and latest technology, not to mention modernizing and renovating traditional indus-tries.13 For example, T.A. Beridze shows that “the main obstacle to scientific and technological progress in the post-communist period is the economy’s inability to accept innovations. The use of physically and morally worn-out equipment is debilitating for the economy.”14
Singling out five sectors of the post-communist economy (the “necroeconomy” in the state sector, the “vitaeconomy” in the state sector, the privatized “necroeconomy,” the privatized “vitaecono-my,” and the “vitaeconomy” created by new private investments),15 Papava notes that the fifth group
11 V.G. Papava, T.A. Beridze, op. cit., p. 93.
12 See: V. Papava, op. cit.; G. Joliia, op. cit., Ch. 7; V.G. Papava, T.A. Beridze, op. cit., Essay 11; V. Papava,
Makroekonomika postkommunisticheskogo perekhodnogo perioda, Tbilisi University Publishers, Tbilisi, 2005, Topic 4; V. Papava, Necroeconomics (Lesson from Georgia), iUniverse, Inc., New York, Lincoln, Shanghai, 2005; E. Ismailov, V. Papava, op. cit.; N. Kakuliia, “Stimulirovanie protsessa restrukturizatsii proizvodstva kak znachitelniy faktor preodole-niia nekroekonomicheskikh rezultatov,” in: Proceedings of the P. Gugushili Institute of Economics, Georgia Academy of Sciences, “Problemy razvitiia rynochnoi ekonomiki v Gruzii,” Vol. 4, Nauka, Tbilisi, 2004, and others.
13 See: V. Burduli, op. cit., pp. 79-81, 175.
14 V.G. Papava, T.A. Beridze, op. cit., p. 57.
15 V. Papava, op. cit., pp. 32-33.
demands particular attention from the state. This is because, given a stable macroeconomic environment, it does not present any “necroeconomic” danger to society.16 The following are indicated among the ways to eliminate the “necroeconomy” during the transition period in the first and third groups: the sale of routine material as scrap metal17 (a large part of the production funds of “necroeconomic” nature has already been utilized in Georgia), the efficiency of the Law on Bankruptcy (which is not occurring lawfully: not one debilitated enterprise went bankrupt legally),18 and the replacement of so-called “post-delets” (slick operators) in the leadership of enterprises with market management19 (this process is going on quite actively in Georgia).
The “necroeconomy” is retained and exists on a routine material-technical base; its products are not in demand and are alien to any market mechanisms. So the problem of eradicating the “necroeconomy,” as Papava justly notes, can be resolved by means of the rapid and ubiquitous spread of market principles of economic regulation, since under the conditions of a market economy, non-competitive production disappears “automatically” without creating any problems for the rest of the economy.
Globalization and the Development of Countries with a Transition Economy
At present, Georgia is mainly feeling the indirect impact of globalization—primarily through the import of products from different states and the difference in import prices, as well as by means of economic and financial assistance from certain countries and their associations, as well as consultation assistance from international economic organizations. But it has not been able to become truly incorporated into globalization, since this requires learning to assimilate new technology and knowledge on a broad scale in order to use them for producing high-quality state-of-the-art products, including (mainly) for export.
This requires the existence of a corresponding investment environment that should include companies involved in introducing new high-tech branches of production (if they are being purchased for investment by domestic producers) and the creation of the necessary infrastructure, mechanisms of sale, service, export (including financial support) of products, insurance of technology, equipment, facilities, products, raw material, and so on.20
An integral part of globalization is the development of local business based on transnational corporations. For countries with a transition economy this is the most convenient alternative, if we exclude the “unloading” of outmoded (already inefficient in developed states) or environmentally polluting technology on these countries and create conditions for incorporating new or latest technology. Such enterprises usually draw many local companies into their sphere of activity in order to produce particular parts and units, as well as sometimes to implement R&D.21 This
16 V. Papava, op. cit., p. 36.
17 Ibid., p. 37.
18 Ibidem.
19 Ibid., p. 35.
20 See, for example: V. Burduli, G. Tsereteli, “Finansovaia sistema Gruzii i problemy razvitia i strukturnoi organizatsii proizvodstva,” Izvestia of the Georgian Academy of Sciences, Vol. 6, No. 4, 1998, p. 153; V. Burduli, G. Tsereteli, “Proble-my dinamizatsii ekonomicheskogo razvitiia Gruzii ,” Izvestia of the Georgian Academy of Sciences, Vol. 7, Nos. 3-4, 1999,
p. 125; V. Burduli, The Mechanism of Regulating the Country’s Economic Development and Ways to Implement It in Practice (A Case Study of Georgia), Nauka, Tbilisi, 2004, pp. 52, 214-218 (in Georgian); V. Burduli, The Coordination of Economic Development at the Regional and Local Levels (A Case Study of Georgia), pp. 175-176, and others.
21 See: V. Burduli, The Coordination of Economic Development at the Regional and Local Levels (A Case Study of Georgia), pp. 176-177.
is also helped by the “outsourcing” that goes on in some corporations,22 when the latter transfer a certain number of their functions to other companies specializing in the relevant processes, and their conformable subdivisions sell or re-profile, thus lowering the costs of their own production, which is extremely important under conditions of intensified competition (particular in the application of innovations).
V. Kondratiev believes that “processes, reverse diversifications ... have become a new direction in the activity of corporations. The most important place here is occupied by outsourcing, when companies transfer all their secondary functions (including marketing, logistics, auxiliary production, purchases, and finances) to other companies and are left only with product development (brands), sales, and the servicing of customers...”23 Iu. Iudanov is of the same opinion: “Introduction of the Internet has made it possible to revolutionize production processes, carry out their decentralization, and even implement the principle of outsourcing —the transfer of certain production functions to specialized external organizations.”24
Another aspect caused by the globalization process is the widespread use of different forms of franchising in international economic relations.25
The globalization of economic relations makes it possible to significantly expand financial activity both with respect to direct investment (whereby, as we know, large foreign direct investments go to the most developed countries, for example, to the U.S.), and with respect to various monetary operations.26 The large banks of developed countries in other states are also stepping up their activity. A graphic example is the purchase by a prestigious French bank of a controlling block of stock of Georgia’s Respublika Bank, which should be regarded as an event that proceeded from the integration processes. The guarantees of one of the largest European banks will make it possible to attract industrial corporations into Georgia that will use bank credits not only for commercial purposes, but also for building state-of-the-art enterprises in the republic, and in the future develop the export potential of our country on this basis.
Globalization: Domestic and Foreign Goods Turnover
Under globalization conditions, it is difficult for a state with a post-Soviet economic level characterized by a shortage of the raw resources actively consumed in the world to achieve a more or less acceptable export-import balance (not to mention a favorable balance) and to supply the population with products manufactured inside the country, although this is not usual for most small countries (the smaller the country, the more open its economy). But the domestic consumption of products manufactured in the state itself (in addition to VAT, they are a source of profits, social, and, to a significant extent, income tax) brings more revenue into the budget.
But globalization, as was shown above, greatly alleviates the modernization of production and the introduction of new and latest technology, the production of which enjoys demand both within the country and abroad, as well as ensures the stable retention of jobs.
22 See, for example: V. Kondratiev, “Makroekonomicheskie problemy konkurentosposobnosti Rossii,” Mirovaia ekonomika i mezhdunarodnye otnosheniia, No. 3, 2001, p. 56; Iu. Iudanov, “Evropeiskie korporatsii v usloviiakh globali-zatsii,” Mirovaia ekonomika i mezhdunarodnye otnosheniia, No. 11, 2001, p. 66.
23 V. Kondratiev, op. cit.
24 Iu. Iudanov, op. cit.
25 See, for example: A. Liasko, “Transaktsionnye izderzhki franchaizingovykh i litsenzionnykh kontraktov,” Vo-prosy ekonomiki, No. 9, 2002, pp. 73-75.
26 See: B. Rubtsov, “Mirovye fondovye rynki,” Mirovaia ekonomika i mezhdunarodnye otnosheniia, No. 8, 2001, pp. 37-38.
Each region of the Caucasus, including Georgia, has its advantages, the use of which is ensured by globalization. When carrying out structural changes, more attention should be focused on defining the priority of the industries, taking account of the republic’s relatively small economic scale, size of population, shortage of arable land, and geo-economic position. When planning import-substituting industries and establishing the most important export-oriented vectors, the sales potential of the planned product in Georgia should be identified and similar possibilities in other countries (in particular those nearby) sounded out. Corresponding intergovernmental consultations should be carried out on these issues, and if necessary special agreements should be entered (on cooperation in production, export quotas, mutual preferences, and so on,27 which was also set forth in several provisions of the WTO).
Under globalization conditions the main thing is ensuring competitiveness of the manufactured products. For this purpose, local production should first be modernized on the basis of advanced technology and, if necessary, the import of units and parts streamlined in order to ensure the efficient work of already existing industries with complex technology. There are already examples of this, but there are even more possibilities for reviving traditional industries with complex technology by means of renovating competitive technology.
The development of export industries is very important for improving the republic’s payment balance: under globalization conditions, the potential for accelerated growth in such industries appears based on the use of the relative advantages of the national economy and a significant reduction in the import tariffs stipulated by the WTO. The resort industry, export of alcoholic beverages, sale of mineral water, as well as sectors whose goods are traditionally exported to nearby countries (including the production of the agroindustrial complex), should be included in such industries. Targeted work should be carried out to study the possibilities of accessing new sales markets for goods produced using our local raw material (cement, brick, other construction material, porcelain, ceramics, and so on).28
With corresponding scientific potential, qualified manpower, and a high level of education in the country, we can also talk of assimilating high technology in certain industries (telecommunication, computer, pharmaceutical, and so on) not only for domestic consumption, but also for export to other countries (in some cases, on the basis of mutual preferences of trade in different kinds of products).29
The attraction of real foreign capital (primarily in the form of the enterprises of transnational corporations) will make it possible to organize the output of more complex products (both for domestic consumption and for export), such as new and latest technology, state-of-the-art materials and structures for the building industry, commodities for the tourist industry or technology for its maintenance, and so on.30
The development of sectors whose products will enjoy steady demand on the domestic market is also a priority. As for import-substituting branches, this particularly concerns the manufacture of electric power, for which there are few possibilities for progress in Georgia. The development of the indicated sectors is very important for building up the production potential of industrially underdeveloped regions of the republic. Here, the most important thing is that processing enterprises of the agroindustrial complex can be created on the basis of the corresponding agricultural industry31 (for example, the processing of raw leather for making shoes using state-of-the-art technology, the production of different types of cheese, and so on).
Without touching on the topic of the country’s transit opportunities in this article (which acquires a special nature under globalization), we will briefly discuss the advantages ofborder trade, to which globalization and the lower customs fees are giving a new boost. In this area, the development of new transporta-
27 See: V. Burduli, “Vneshneekonomicheskie otnosheniia i promyshlennaia politika,” Politika, No. 3, 1999, p. 22.
28 See: Ibid., p. 23.
29 See: Ibidem.
30 See: Ibidem.
31 See: Ibidem.
tion routes is particularly important, for example, the Kars-Akhalkalaki railroad.32 Both industrial and agricultural production based on border trade can significantly progress in the mentioned regions.
Of course, globalization has its negative aspects, for example, contamination of the environment. Methods for fighting this are being developed, although their introduction also requires significant expenses. All the same, under globalization conditions, transportation routes are being partially replaced by telecommunications, which reduces the need for energy and, consequently, lowers the level of thermal pollution of the biosphere.
C o n c l u s i o n
The absence of competition in the former socialist republics led to a deterioration in product quality and a lag in the technological level of production behind developed market countries in most industries (particularly those satisfying the consumer demands of the population). A few raw material sectors that brought in high revenue by means of sales abroad, branches of the military-industrial complex and a few others, the production of which was under the government’s strict control, were exceptions. The production of several enterprises was so low in quality that it did not enjoy demand, but the sale of “intermediate” production of such industries (component parts, units, some types of raw material) in the command system was nevertheless realized.
After the socialist mechanism of management collapsed in the Council for Economic Mutual Assistance countries and the Soviet republics, a multitude of entirely non-competitive enterprises remained in the countries with a transition economy that arose in their place. Their number grew even more after the breakdown in production ties at different levels.
Professor V. Papava studied the processes of inevitable deterioration in product quality and technological backwardness that occurred during the past decades of the Union’s existence and after its demise in states with a transition economy. The “theory of necroeconomics” he substantiated for the first time in the economic literature shows how the “necroeconomy” emerged and describes its components, the specifics of its manifestation at different stages of the transition period, the mechanisms of gradual self-elimination (under conditions of a market legislative environment), and its replacement by a competitive economy.
The republic’s intensive incorporation into the globalization process will help to ultimately eradicate the “necroeconomy” and complete the creation of an efficient competitive market economy in Georgia. The formation of a corresponding market environment will cause real investments to be attracted into the country in the form of new and latest technology. The globalization process is providing many new ways to move knowledge and technology from state to state: for example, domestic producers can buy them directly themselves (by means of franchising relations and entering licensing contracts). The attraction of enterprises of transnational industrial corporations is especially important, which will not only create new jobs for the population, but also, through their contract orders, ensure work for several domestic enterprises (accessories, units, marketing, the development of know-how).
Widespread incorporation into globalization will serve as a source of sufficient opportunities for increasing domestic and foreign goods circulation. As jobs at new contemporary enterprises are created, the population will have more money; what is more, bank deposits will multiply and the stock market will receive a certain boost. The fact that competitive products will be able to occupy particular niches on the foreign goods markets and, in so doing, improve Georgia’s export-import balance is also very important.
32 See: V. Burduli, The Coordination of Economic Development at the Regional and Local Levels (A Case Study of Georgia), p. 162.
