CC BY
34
Nazim MUZAFFARLI (IMANOV)
D.Sc. (Econ.), professor, editor-in-chief, The Caucasus & Globalization Journal (Baku, Azerbaijan).
COMPARATIVE ECONOMIC COMPETITIVENESS OF THE CENTRAL CAUCASIAN STATES
Abstract
This article examines the competitiveness of the Central Caucasian states compared to other developing countries of Europe and Central Asia. An analysis of the methodology and results of international comparative studies of business competitiveness, economic growth, technological development, public institutions, macroeconomic environment and other
parameters helps to identify the areas of potential competitive advantage of countries and to develop strategies designed to achieve and enhance their comparative advantage. The implementation of these strategies depends in large part on the quality of the business environment, which is also becoming a matter of cross-country competition in the modern world.
The Core of the Problem
Globalization of competition as a characteristic feature of today’s world and a component of economic globalization is expressed, among other things, in the fact that more and more national economies are turning into agents of international competition. Cross-country competition today is much more important for the domestic economic development of countries. It is usually stiffer than domestic competition and compels enterprises to reduce production costs, enhance the quality of goods and services, improve management and look for sales markets, so encouraging more rational use of national resources and ultimately increasing the competitiveness of the whole country.
A search for ways to enhance competitiveness—both of businesses and of the country as a whole—is becoming a key function of the government: from now on, its duty is to look for areas of national competitive (comparative) advantage and to stimulate their development using economic regulation.
By national competitiveness is usually meant how successfully a country’s enterprises (or foreign enterprises located in its territory) compete in the production of goods and services with enterprises located abroad. The sectors in which the country is doing well constitute its comparative advantages over other countries, while those which it can or plans to turn into such are its potential comparative advantages. These can be both goods and services produced in the country and natural resource endowments.
For example, significant oil and gas reserves are an obvious comparative advantage of Azerbaijan, although it should regard these reserves exclusively as an initial advantage, because in the long
term, as global development trends show, the greatest economic successes are achieved by countries whose economic structure is dominated by intellectual services.1
Factors contributing to a country’s economic competitiveness may even include its geographical location. In particular, some experts believe that the location of Azerbaijan and Georgia at the intersection of major transportation-communication corridors linking Europe with Asia and the North with the South is their main comparative advantage.2 At the same time, one should take into account that both a country’s natural (including recreational) resources and its geographical location may be no more than potential competitive advantages. In order to be converted into actual advantages, they must be realized in the economy, i.e., they must generate real export earnings either directly, as in the case of natural resources, or indirectly, as in the case of recreational resources or geographical location (it is common knowledge that, financially speaking, the attraction of tourists and transit traffic are certain kinds of exports).
In practical terms, the conversion of potential competitive advantages into actual advantages is a fairly difficult task, because it is conditioned by a whole range of factors (including political ones) working in different directions. Take Armenia, which theoretically has a significant potential in the field of international transit, but today it is practically not involved in any of the major transportation-communication projects being implemented in the Caucasus. Due to its expansionist foreign policy, expressed not only in its military aggression against Azerbaijan, but also in various claims (including territorial claims) on neighboring states, Armenia has placed itself outside regional projects.
The competitive strategies of states (i.e., strategies designed to achieve and enhance their comparative advantage) can be oriented toward different factors of economic progress. Michael Porter, one of the best-known researchers of national competitiveness, singles out four kinds of competitive strategies: based on factors of production (natural resources, cheap labor, etc.), investment, innovation and wealth (accumulated resources), showing that real advantages are achieved by countries competing based on innovation.3 The quality (friendliness) of the business environment, as it were, is left out of the set of these material factors driving competitiveness, although it undoubtedly plays an extremely important role in realizing their potential, which is why we will return to it later.
Growth Competitiveness Index (Growth CI)
One of the most large-scale studies measuring national competitiveness is conducted by the World Economic Forum (Switzerland). Since 1979, the WEF has annually published a Global Competitiveness Report, which compares over 100 countries of the world (the latest report, 125 countries) in terms of several indicators, starting with the Growth Competitiveness Index.
In assessing the competitiveness of economic growth in a given country, it is necessary to take into account its development level. Although technological innovations are the main driving force behind economic development in the modern world, their role is not the same in different countries. The most advanced industrial states are interested in developing, implementing and selling their own innovations, and less developed countries, in adopting and implementing innovations from abroad.
1 For more detail, see: N. Imanov, Reiting Azerbaidzhana, Kavkaz Publishers, Baku, 2006, pp. 188-203.
2 See: E. Ismailov, V. Papava, The Central Caucasus: Essays on Geopolitical Economy, CA&CC Press® AB, Stockholm, 2006, pp. 78-83, 103-106.
3 See: M.E. Porter, The Competitive Advantage of Nations, The Free Press, New York, 1990.
In view of this circumstance, all countries in the world are divided into two groups: the core innovators and the non-core innovators. According to the authors of the WEF report, core innovators are countries with more than 15 utility patents per million population registered in the United States in the most recent year for which information is available. All other countries, including those of the Central Caucasus (Azerbaijan, Georgia and Armenia), are regarded as non-core innovators. The Growth CI as a whole and the first of its three component indexes are calculated depending on whether the country in question is a core or non-core innovator.
The Growth Competitiveness Index includes three component indexes:
■ technology index;
■ public institutions index;
■ macroeconomic environment index.
The separate rankings for these component indexes, calculated based on a set of specific subindexes, are considered below.
A. Technology Index
This component index, as noted above, is calculated separately for the core and non-core innovators using the following subindexes:
For core innovators
Technology index = 1/2 innovation subindex
+ 1/2 information and communication technology subindex
For non-core innovators
Technology index = 1/8 innovation subindex
+ 3/8 technology transfer subindex
+ 1/2 information and communication technology subindex
The information base for calculating subindexes consists of two sources: statistical data (“hard data”) and the results of opinion surveys conducted by WEF experts (“survey data”), with different weightings of these sources.
In the innovation subindex, for example, the weight assigned to hard data is three-quarters, and to survey data, one-quarter. The former include data on the number of utility patents per million population and the share of students of higher education institutions (tertiary enrollment rate). The surveys include four questions:
(i) technological readiness (how the country compares with the world’s top performers in new technology usage);
(ii) firm-level technology absorption (how aggressive are the country’s companies in adopting new technologies);
(iii) company spending on research and development (how company expenditure levels for R&D compare with similar indicators in other countries);
(iv) university/industry research collaboration (how closely the country’s companies collaborate with research centers).
The technology transfer subindex is determined based only on opinion surveys as an unweighted average of two survey questions:
(i) FDI and technology transfer (whether foreign direct investment is a major source of new technologies);
(ii) prevalence of foreign technology licensing (whether foreign licenses are a common way of acquiring new technologies).
The information and communication technology (ICT) subindex is calculated on the basis of both hard data (two-thirds) and survey data (one-third). The former include: cellular telephones per 100 population, Internet users per 10,000 population, Internet hosts per 10,000 population, telephone lines per 100 population, and personal computers per 100 population.
The surveys include five questions:
(i) Internet access in schools;
(ii) quality of competition in the ISP sector (whether competition among Internet service providers is sufficient to ensure high quality and continuity of services, as well as low prices);
(iii) government prioritization of ICT;
(iv) government success in ICT promotion;
(v) laws relating to ICT (whether the country’s legislation in the field of information and communication technologies, including e-commerce, digital signatures and consumer protection, is sufficiently developed and how it is implemented).
The higher a country’s total score on these three subindexes, the higher is its ranking in the technology index. Based on these rankings, we compiled Table 1. It shows countries which, according to many internationally accepted classifications of regions of the world, are included among the so-called developing countries of Europe and Central Asia (ECA), and also the highest and lowest-ranking countries. The ranks are given in accordance with the global classification.
The world leaders in technological development are the United States, Taiwan and Sweden, while Chad and Burundi are the worst performers. Azerbaijan ranks 79th in the world, 16th in the region (according to the classification of regions adopted in this study) and 3rd in the CIS following Kazakhstan and Russia (Belarus, Turkmenistan and Uzbekistan are not included in the list of countries assessed). In the Central Caucasus, it ranks above both Georgia (which shares 90th and 91st places with Macedonia) and Armenia (rank 95). This order differs significantly from that of the previous year: in 2005, Azerbaijan shared 87th and 88th places with Sri Lanka, ranking above Armenia (93-94) but below Georgia (84). In 2006, Azerbaijan’s position improved, whereas Georgia and Armenia dropped in the ranking.
A comparative assessment of the technological level of countries reveals a number of departures from the commonly held view. For example, Taiwan’s 2nd place ahead of such countries of its region as Japan and South Korea may appear to be somewhat unexpected. The achievements of Israel, which is 10th in the global ranking, are quite impressive, while the United Kingdom (17) and Germany (18) rank below Singapore (16).
But a detailed analysis of the economic situation in these countries and their government policy over the past 15-20 years provides an exhaustive explanation of all these “surprises.”
At the very beginning of the 1990s, Singapore announced a fairly ambitious economic development strategy, whose central idea was that in the coming decades the country would concentrate its efforts on the development of human resources and the so-called “soft” infrastructure. The state focused its efforts on raising the education level and skill standards of the national workforce, developing a network of technical competence centers and research institutes to ensure effective use of innovations by companies, creating a favorable social climate, improving the institutional structure in
Table 1
Technology Index (ECA Developing Countries, Best and Worst Performers, 2006)4
Rank Country Score Rank Country Score
1 United States 6.05 69 Bulgaria 3.32
2 Taiwan 5.78 72 Kazakhstan 3.22
3 Sweden 5.73 73 Russian Federation 3.20
79 Azerbaijan 3.09
14 Estonia 4.78 89-90 Ukraine 2.91
22 Czech Republic 4.36 91-92 Macedonia 2.90
28 Slovenia 4.19 91-92 Georgia 2.90
29 Hungary 4.17 93-94 Bosnia and Herzegovina 2.89
30 Slovak Republic 4.16 95 Armenia 2.88
38 Lithuania 3.91 99 Moldova 2.81
39 Latvia 3.89 102-103 Albania 2.76
41 Croatia 3.82 111-112 Tajikistan 2.63
51 Romania 3.60 119 Kyrgyz Republic 2.53
55-56 Turkey 3.53
57-58 Poland 3.52 124 Chad 2.05
60-61 Serbia and Montenegro5 3.47 125 Burundi 2.04
order to provide additional incentives to innovation, and implementing governance mechanisms based on close cooperation between labor, business and government.6
Continuing this political line, in early 2006 the Singapore government (namely, the Ministry of Trade and Industry) approved a new five-year government program for developing science and technology. This program, as intended by its authors, is to build on the successes already achieved in order to place the country among the world leaders in the field of innovation.7
4 Compiled from: The Global Competitiveness Report 2006-2007 released by The World Economic Forum, pp. 556557, available at [http://www.weforum.org/en/initiatives/gcp/index.htm].
5 In accordance with the realities of the period under review, Serbia and Montenegro in this WEF report are regarded as a single state.
6 See: The Strategic Economic Plan: Towards a Developed Nation. The Vision for Singapore: A Developed Country in the First League, available at [http://app.mti.gov.sg/data/pages/885/doc/NWS_plan.pdf].
7 See: Sustaining Innovation-Driven Growth: Science and Technology. Plan for 2010, available at [http://app. mti.gov.sg/default.asp?id=885].
Prominent places in the ranking for the technology index are occupied (and can be occupied) only by countries which regard the development and implementation of innovations as top government priorities, removing all barriers to effective enterprise development and consistently improving the political, economic and moral environment. These are countries where people—and not natural resources, a favorable geographical location or international reserves—are regarded as the main economic development resource.
B. Public Institutions Index
This component index is calculated similarly for core and non-core innovators based on two subindexes: a contracts and law subindex and a corruption subindex. They have the same weight and
Table 2
Public Institutions Index (ECA Developing Countries,
Best and Worst Performers, 2006)8
Rank Country Score
1 Denmark 6.53
2 New Zealand 6.47
3 Iceland 6.46
26 Estonia 5.53
29 Slovenia 5.38
41 Hungary 5.16
45 Slovak Republic 4.95
46 Czech Republic 4.87
50-51 Latvia 4.81
50-51 Lithuania 4.81
54 Turkey 4.68
61-62 Moldova 4.35
63 Bulgaria 4.33
68 Croatia 4.21
72-73 Poland 4.03
Rank Country Score
72-73 Romania 4.03
74-75 Armenia 4.01
76 Kazakhstan 4.00
82 Serbia and Montenegro 3.95
83 Azerbaijan 3.89
85 Georgia 3.86
86 Ukraine 3.83
88-89 Bosnia and Herzegovina 3.81
93 Russian Federation 3.78
101-102 Macedonia 3.66
105-107 Albania 3.56
105-107 Tajikistan 3.56
123 Kyrgyz Republic 2.94
124 Chad 2.79
125 Bangladesh 2.48
are determined from the results of opinion surveys. The contracts and law subindex consists of responses to the following questions:
(i) judicial independence (whether judges and courts are independent from the political influence of the authorities, citizens and companies);
(ii) property rights (whether financial assets and wealth are adequately regulated and protected by national legislation);
(iii) favoritism in decisions of government officials (whether governments are neutral in awarding public contracts);
(iv) organized crime (whether organized crime imposes significant costs on businesses).
The corruption subindex is based on the following questions:
(i) irregular payments in exports and imports (whether businesses have to pay bribes to clear goods through customs);
(ii) irregular payments in public utilities (whether businesses have to pay bribes to gain access to utility services);
(iii) irregular payments in tax collection (whether businesses have to pay bribes to settle their tax obligations).
The survey results are used to rank countries in terms of the public institutions index. A sample of this ranking is presented in Table 2.
Denmark is a leader in the world ranking, closely followed by New Zealand and Iceland. These three countries were also the top performers in last year’s classification. The three worst performing countries have not changed either: Bangladesh, Chad and the Kyrgyz Republic. As before, Estonia is the highest-ranking economy in the region, and Moldova in the CIS.
Azerbaijan ranks 83rd in the world with a score of 3.89 (in 2005, it was 67th with a score of 4.09), 17th in the region, and 4th in the CIS.
In the WEF study, a comparison of countries based on the level of development of public institutions is more political than economic. Besides, considering the characteristics of the state institutional system examined in the report, this ranking can hardly be regarded as an exhaustive assessment of the maturity of public institutions. But it should be taken into account that the authors are interested only in those aspects of institutional development that have a direct influence on the economic competitiveness of countries.
C. Macroeconomic Environment Index
This component index is calculated as a weighted average of three subindexes as follows:
Macroeconomic environment index = 1/2 macroeconomic stability subindex
+ 1/4 country credit rating
+ 1/4 government waste
The macroeconomic stability subindex is calculated on the basis of both hard and survey data. The former have a stronger influence on this subindex (with a weight of 5/7) than the latter (2/7). Hard data include:
■ government surplus/deficit;
■ national savings rate;
■ inflation;
■ real effective exchange rate;
■ interest rate spread;
■ government debt.
The macroeconomic stability survey includes two questions:
(i) recession expectations (whether an economic recession is possible next year);
(ii) recent access to credit (whether company borrowings became easier or more difficult in the past year).
Table 3
Macroeconomic Environment Index (ECA Developing Countries,
Best and Worst Performers, 2006)9
Rank Country Score
1 Singapore 5.88
2 Norway 5.79
3 Denmark 5.69
25 Estonia 4.93
33 Slovenia 4.74
37 Latvia 4.65
38 Kazakhstan 4.62
46 Lithuania 4.44
47-48 Slovak Republic 4.43
47-48 Czech Republic 4.43
55 Russian Federation 4.23
58 Azerbaijan 4.11
59 Poland 4.08
61 Croatia 4.03
62 Bulgaria 4.02
Rank Country Score
64-65 Hungary 3.95
73 Turkey 3.75
75-76 Romania 3.70
77 Macedonia 3.68
81 Ukraine 3.60
83 Armenia 3.58
90 Georgia 3.47
91 Bosnia and Herzegovina 3.40
92-93 Serbia and Montenegro 3.37
95 Albania 3.35
99-100 Tajikistan 3.28
101-102 Moldova 3.27
122 Kyrgyz Republic 2.58
124 Burundi 2.43
125 Zimbabwe 1.84
The country credit rating for private investors is taken from foreign sources, while government waste is measured based on a single survey question:
(i) wastefulness of government spending (whether public resources are spent wastefully or provide enterprises with the required goods and services unavailable in the market).
This methodology enables the WEF to compare countries in terms of the macroeconomic environment index. A sample of the world ranking in this component index is given in Table 3.
Singapore, Norway and Denmark are the highest-ranking countries in the world. Estonia is once again the best performer in the region, and Kazakhstan in the CIS. Azerbaijan (with a score of 4.11) ranks 58th in the world, 9th in the region, and 3rd in the CIS. The macroeconomic situation in Azerbaijan is much better than in the other countries of the Central Caucasus: Georgia and Armenia.10 This is Azerbaijan’s best result in the rankings for the three component indexes of the Growth CI, followed by its 79th place in the technology index and, finally, its 83rd place in the public institutions index.
D. Overall Growth Competitiveness Index
This index, as already noted, is calculated based on the three component indexes examined above. The weightings here are as follows:
For core innovators
Growth Competitiveness Index = 1/2 technology index
+ 1/4 public institutions index
+ 1/4 macroeconomic environment index
For non-core innovators
Growth Competitiveness Index = 1/3 technology index
+ 1/3 public institutions index
+ 1/3 macroeconomic environment index
So, once the Growth CI component indexes are known, the overall index is found by means of simple arithmetic calculations. Some of the results obtained are given in Table 4.
Finland has the most competitive economic growth in the world. The top ten countries also include Sweden, Denmark, the United States, Iceland, Taiwan, Norway, Switzerland, the Netherlands, and Singapore.
Azerbaijan with a Growth CI of 3.7 is 75th in the world, 15th among 25 ECA developing countries, and 3rd among nine CIS countries.11 As in 2005, it ranks above its neighbors in the Central Caucasus: Georgia and Armenia. Compared to other states in the world, economic growth in all the three countries has become somewhat less competitive. In last year’s report, Azerbaijan, Geor-
10 It is interesting to note that other international financial institutions provide an equally high assessment of Azerbaijan’s macroeconomic stability (see, for example: EBRD: Country Strategy for Azerbaijan in 2007-2010 (Draft), available at [http://www.ebrd.com/about/strategy/country/azer/draft.pdf], 9 August, 2007.
11 Given the specifics of the parameters assessed, it is safe to say that the inclusion of the remaining CIS countries (Belarus, Turkmenistan and Uzbekistan) would not change Azerbaijan’s positions in the rankings.
Table 4
Growth Competitiveness Index Ranking (ECA Developing Countries,
Best and Worst Performers, 2006)12
Rank Country Score Rank Country Score
1 Finland 5.85 70 Romania 3.78
2 Sweden 5.76 74 Russian Federation 3.74
3 Denmark 5.63 75 Azerbaijan 3.70
79-80 Serbia and Montenegro 3.60
16-17 Estonia 5.08 82 Armenia 3.49
30 Slovenia 4.77 83 Moldova 3.48
38 Czech Republic 4.55 84-85 Ukraine 3.45
39 Slovak Republic 4.52 87 Macedonia 3.42
42 Latvia 4.45 88 Georgia 3.41
43 Hungary 4.43 92-93 Bosnia and Herzegovina 3.37
44-45 Lithuania 4.39 103 Albania 3.22
56 Croatia 4.02 108 Tajikistan 3.16
57 Turkey 3.99 122 Kyrgyz Republic 2.68
60 Kazakhstan 3.95
63-65 Bulgaria 3.89 124 Burundi 2.58
66 Poland 3.88 125 Chad 2.46
gia and Armenia ranked 69th, 86th and 79th, respectively. Meanwhile, their absolute indicators have markedly increased: from 3.64 to 3.70 for Azerbaijan, from 3.25 to 3.41 for Georgia, and from 3.44 to 3.49 for Armenia.
Business Competitiveness Index (BCI)
The economic competitiveness of countries, as noted above, is closely associated with the competitiveness of companies operating in its territory. That is why apart from studies designed to assess long-term macroeconomic development factors, the World Economic Forum also makes international comparisons of microeconomic factors as expressed in the current competitiveness of companies
(business competitiveness). The idea is that microeconomic factors are also important for national competitiveness, because material values are created by enterprises.
The BCI has a fairly complex structure. It is composed of two subindexes, each of which measures a number of components of the microeconomic environment and is calculated on the basis of opinion surveys:
Sophistication of company operations and strategy Nature of firm's competitive advantages Extent of innovation Sophistication of production Sophistication of marketing
Sophistication of organizational structures and incentives Extent of internationalization
Quality of the national business environment Factor (input) conditions
Physical infrastructure Administrative infrastructure Human resources Technology infrastructure Capital markets Context for firm strategy and rivalry Incentives
Policies affecting competition Demand conditions Related and supporting industries
State of cluster development
Selected results of cross-country comparisons for the Business Competitiveness Index and its subindexes are given in Table 5.
In terms of the overall BCI, Azerbaijan ranks 77th in the world and 2nd in the CIS (as in the comparisons of growth competitiveness, Belarus, Turkmenistan and Uzbekistan are not included in the list of countries assessed). In the sophistication of company operations and strategy subindex, Azerbaijan is 66th in the world ranking, and in the quality of the national business environment subindex it occupies 78th place. In terms of the overall BCI and both of its subindexes, Azerbaijan is well ahead of its neighbors in the Central Caucasus.
A very disturbing fact for virtually all CIS countries is that over the past year the relative competitiveness of their enterprises has declined significantly (Tajikistan being the only exception). This trend is particularly pronounced in Kazakhstan, Ukraine and Georgia. Only Azerbaijan has been able to move up in the ranking for company operations and strategy, and Tajikistan, in the quality of the business environment.
Table 5
Business Competitiveness Index and Subindex Rankings (CIS Countries and Best Performers)13
Country BCI ranking Company operations and strategy ranking Quality of the national business environment ranking
2006 2005 2006 2005 2006 2005
United States 1 1 1 1 1 1
Germany 2 2 2 2 2 3
Finland 3 3 8 8 3 2
Kazakhstan 70 64 74 73 70 62
Azerbaijan 77 72 66 67 78 73
Russian Federation 79 70 78 78 77 67
Ukraine 81 68 82 71 80 69
Moldova 90 88 91 89 91 89
Armenia 94 87 101 86 93 88
Tajikistan 98 100 108 108 97 98
Georgia 100 90 97 91 101 90
Kyrgyz Republic 112 105 114 90 112 107
A comparison of the results for the competitiveness of economic growth (Growth CI) and the competitiveness of companies (BCI) empirically confirms the existence of a direct relationship between them based on the undeniable fact that both macroeconomic and microeconomic factors are drivers of effective economic development. The Growth CI and the BCI characterize the very same national competitiveness, but from different angles.
For a graphic comparison of growth and business competitiveness (Chart 1), the lists of countries ranked in the Growth CI and the BCI were unified. The chart reflects data for 121 countries assessed in terms of both growth and business competitiveness. Countries located on the median line occupy identical places in the two rankings.
All three countries of the Central Caucasus lie above the median. This means they rank higher in the Growth Competitiveness Index than in the Business Competitiveness Index. In other words, macroeconomic conditions are more favorable than microeconomic conditions.
There is no fixed relationship between the economic development level of countries and the kind of environment—macro or microeconomic—that is more favorable in these countries. The developed countries are located both above the trend line (Finland, Denmark, Sweden, Taiwan, Iceland, Norway, Australia and others) and below it (U.S., Netherlands, Japan, U.K., Germany, Canada, Austria and others). The same is true of countries that are relatively less developed economically.
Chart 1
The Competitiveness of the Business Environment
The inclusion of the business environment among the parameters used by the WEF to measure business competitiveness is perfectly justified. The quality of the business environment is responsible in large part for the level of capitalization of earnings in the country and the scale of foreign investment, and ultimately for the rate and sustainability of economic growth. That is why a favorable national environment for business is a special kind of competitive advantage.
In WEF reports, the quality of the national business environment is of a subordinate nature, because it is only an instrument for measuring business competitiveness. Meanwhile, there are several internationally recognized analytical centers that make special cross-country comparisons of the business climate. The most comprehensive and popular among these are the annual surveys of the World Bank (Doing Business series) and joint studies by the Heritage Foundation and The Wall Street Journal (Index of Economic Freedom).14
A. The Ease of Doing Business According to the World Bank
The World Bank (WB) analyzes 10 parameters of the business environment: starting a business, dealing with licenses, employing workers, registering property, getting credit, protecting investors,
14 The methodology of these studies and the reliability of their results are analyzed in detail in: N. Imanov, op. cit., pp. 237-388. The book also contains the author’s recommendations for improving the business environment in Azerbaijan.
paying taxes, trading across borders, enforcing contracts, and closing a business. Cross-country comparisons are made both separately for each of these parameters and for the ease of doing business as a whole. In its Doing Business 2007 report, the World Bank ranked 175 countries and certain nonsovereign territories. Table 6 shows the rankings of the Central Caucasian countries for the overall indicator and for each of its components in 2005 and 2006. The rankings for 2005 were recalculated with due regard for the changes in methodology made in 2006 and for the increase in the number of countries surveyed.
Table 6
Overall and Component Rankings of the Central Caucasian Countries on the Ease of Doing Business15
Countries Azerbaijan Georgia Armenia
Indicators 2005 2006 2005 2006
Starting a business 104 96 59 36 48 46
Dealing with licenses 161 162 152 42 70 36
Employing workers 68 66 71 6 22 41
Registering property 60 59 18 16 6 2
Getting credit 19 21 96 48 76 65
Protecting investors 114 118 133 135 81 83
Paying taxes 139 136 160 104 147 148
Trading across borders 158 158 149 96 113 119
Enforcing contracts 33 34 56 32 19 18
Closing a business 67 70 98 86 39 40
Overall ease of doing business 100 99 112 37 37 34
Both in the overall ease of doing business (the friendliness of the business climate) and in most of its components, Azerbaijan lags significantly behind its neighbors in the Central Caucasus. Despite some improvements in its positions on a number of indicators (starting a business, employing workers, registering property and paying taxes), Azerbaijan has generally been unable to carry out reforms that could radically improve the business environment in the country. In contrast to Azerbaijan, in 2007 Georgia was recognized by the World Bank as a “top reformer.” Reforms have enabled it to rise in a single year from 112th to 37th place. Georgia’s achievements in simplifying the procedures for hiring and firing workers and for dealing with licenses are particularly impressive.
At the same time, it should be borne in mind that some of the indicators used by the World Bank are in actual fact insufficiently representative for cross-country comparisons. Based on rankings compiled with the use of these indicators, it is very hard to draw conclusions or formulate recommendations. We call such rankings tentative (or relative).
Indicators of this kind include, for instance, the ease of hiring and firing employees. It is true that tight government regulation of employment, dismissal and working hours or high hiring and firing costs are disadvantageous to employers and should be interpreted as factors worsening the busi-
ness environment. But, on the other hand, any state seeks to guarantee its citizens a certain level of social protection, including in matters of employment and dismissal. That is why the difficulty of firing workers, when seen from the opposite side, appears as a guarantee of their social protection. Consequently, the ease (difficulty) of hiring and firing workers is a particular case of the relationship between the quality of the business environment and the social protection of citizens.
It is no accident that a number of developed European countries rank fairly low on the ease of hiring and firing workers. They include Germany (rank 129), France (134), Turkey (146), Portugal (155), Spain (161) and Greece (166). In these countries, government protection of the social interests of workers is among the top priorities of domestic policy. Meanwhile, other economically prospering states intervene in employment processes to a much lesser extent. They include the United States (rank 1), Singapore (3), Australia (9), New Zealand (10), Canada (13), Denmark (15) and the United Kingdom (17). This does not mean that the population in the second group of countries is less socially protected than in the first group. They simply espouse a different philosophy of social protection, according to which economic self-regulation is the best form of such protection. They seek to limit government intervention in matters of employment in the belief that employers and employees can find more rational solutions when acting on their own than through the agency of the state.
Which of these two approaches is more effective for a given country at each particular historical stage depends on a whole range of factors, primarily the potential for economic self-regulation. For newly independent transition states, a total absence of government regulation in the field of employment is hardly acceptable: in the conditions of a more or less general labor surplus in these countries, emerging business seeks to pursue its own short-term interests in preference to all the rest. But it is also for this very reason (i.e., since business is just emerging) that excessively broad and tight control of employment is equally unacceptable.
That is why Azerbaijan’s “middle” position in cross-country rankings on the ease of hiring and firing workers, as in many other tentative rankings, should be regarded as perfectly satisfactory. But it is quite obvious that, generally speaking, Azerbaijan could offer its enterprises, as well as foreign investors, a more competitive environment for business activity than the current one.
B. Level of Economic Freedoms
In contrast to World Bank reports, which largely focus on bureaucratic barriers to business, the Index of Economic Freedom concentrates on the quality of economic policy pursued in various states. Using econometric methods, the authors measure the level of government intervention in the economy (and, as the other side of the coin, the level of economic freedom), which enables governments to compare the situation in their own country with the world’s top performers and to adjust their economic policy.
In order to measure the overall level of economic freedom, the authors of the Index analyze 50 relatively independent economic indicators, which enable them to assess 10 component economic freedoms:
■ business freedom (the ease of starting, operating and closing a business);
■ trade freedom (absence of tariff and nontariff barriers to exports and imports);
■ monetary freedom (combined assessment of inflation and price controls);
■ freedom from government (measured by the level of government spending and the share of state-owned enterprises);
■ fiscal freedom (freedom from excessive taxes);
■ property rights (assessment of the degree of protection of private property rights by the country’s laws and actual enforcement of these laws);
■ investment freedom (especially foreign investment);
■ financial freedom (liberalization of the banking sector and its independence from government control);
■ freedom from corruption (level of public perception of corruption in the judicial and administrative systems);
■ labor freedom (level of government intervention in economic relations between employers and employees).
In 2007, the Index includes 157 countries, ranked in terms of both the overall level of economic freedom and each of the above-mentioned specific freedoms. Table 7 shows the overall and specific indicators for the countries of the Central Caucasus.
Table 7
Overall and Component Rankings of the Central Caucasian Countries on Economic Freedom16
Countries Azerbaijan Georgia Armenia
Indicators rank freedom (%) rank freedom (%) rank freedom (%)
Business freedom 92 58.0 31 78.9 22 84.5
Trade freedom 76 67.6 96-98 61.8 36 75.6
Monetary freedom 80-82 76.8 70 77.9 51 79.7
Freedom from government 34 86.6 12 91.3 6-7 91.6
Fiscal freedom 56 87.2 13-14 94.2 18 93.1
Property rights 81-138 30.0 81-138 30.0 81-138 30.0
Investment freedom 111-148 30.0 43-51 60.0 43-51 60.0
Financial freedom 131-143 30.0 18-37 70.0 18-37 70.0
Freedom from corruption 137-141 23.0 131-136 23.0 93-101 29.0
Labor freedom 69-70 65.4 1 99.9 19 80.9
Overall economic freedom 107 55.4 35 68.7 32 69.4
In terms of almost all economic freedom indicators, Azerbaijan lags significantly behind its neighbors in the Central Caucasus. In the overall indicator, it is included in the group of “mostly un-free countries,” while Georgia and Armenia are in the group of “moderately free” countries. This
16 Compiled from: 2007 Index of Economic Freedom, available at [http://www.heritage.org/research/features/index/ index.cfm].
means that as regards the level of economic freedom Azerbaijan offers a less competitive environment to its entrepreneurs than Georgia or Armenia.
C. Comparing Three Approaches to an Assessment of the Business Environment
The WEF methodology for studying the quality of the business environment differs significantly from the methodology used in Doing Business or in the Index of Economic Freedom, especially because it identifies a set of so-called factor (input) conditions. This is a very important addition, without which an analysis of the business environment cannot be regarded as exhaustive. Even the highest degree of economic freedom granted by the state to businesses cannot ensure their normal operation without factor conditions, such as physical infrastructure.
An absence of bureaucratic barriers or low taxes enhancing motivation (like all other aspects of a favorable economic environment) are no substitute for physical infrastructure such as access to electricity, without which an enterprise will simply be unable to operate (whether efficiently or not). Other factor conditions—administrative and technology infrastructure, human resources (quality of labor)—are no less important in assessing the quality of the business environment. Moreover, factor conditions for business activity are basic in relation to all the rest.
That is why Azerbaijan’s higher WEF rankings relative to its neighbors are among its essential competitive advantages. The point is that an improvement in factor conditions for business activity requires much more time and resources (including financial resources) than many other components of the economic environment. For example, an improvement in legal guarantees of private property rights and a tightening of their practical implementation (despite their fundamental importance) nevertheless lie within the realm of government economic policy; they can be achieved in a relatively short period and do not require additional resources. The same can be said of most other components of the quality of the business environment as assessed in Doing Business and the Index of Economic Freedom.
A comparison of the ranks assigned to countries for the quality of the business environment depending on the results of various studies cannot be regarded as an “exhaustive” basis for conclusions on the degree of their objectivity. In particular, the World Bank and the World Economic Forum consider different aspects of the business environment, so that the differences in the places assigned to countries in these two rankings are easily explained. Nevertheless, such a comparison is very fruitful for clarifying the parameters of the business environment in which a particular country’s performance is better or worse. It thereby provides the groundwork for practical recommendations.
In graphic form, the results of a comparison of WB and WEF rankings are presented in Chart 2. In its preparation, the ranked lists were unified on the same principle as in Chart 1. In the unified list we left 116 countries which are present in both studies.
The median connecting the points of intersection of maximum and minimum values shows identical places occupied by countries in the two rankings. For example, after the unification of the lists we find Azerbaijan lying on the median with 73rd place in the rankings of both the World Bank and the WEF.
If a country lies above the median, this means that in the WEF rankings it occupies a higher place than in the WB rankings. The largest deviation of this kind is observed for India and Indonesia. In the WEF rankings India is 27th, and in the WB rankings it is 101st, and Indonesia is 37th and 102nd, respectively. If a country lies below the median, this means it has a higher place in the WB rankings than in those of the WEF. The largest deviation of this kind in the world is observed for two Central Caucasian countries: Georgia and Armenia. Georgia ranks 33 rd in the WB list and 96th in the WEF list, and Armenia is 30th and 88th, respectively. (Country rankings are given with due regard for the changes resulting from the unification of the ranked lists.)
Chart 2
WB Ranking vs. WEF Ranking on the Business Environment 0
20
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in 40 k n a
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c
la 80
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100 120
120 100 80 60 40 20 0
Place in WB ranking
Allowing for possible measurement errors, we can conclude that in countries located above the median the development level of factor conditions for business activity is higher than the relative level of liberalization of the business environment, especially in the matter of removing bureaucratic barriers to business. In countries located below the median, on the contrary, factor conditions lag behind the liberalization of regulatory mechanisms.
Azerbaijan is among the countries where the level of development of factor conditions—com-pared to other countries in the world—roughly matches the degree of liberalization of economic management. Given the relatively low places it occupies in the two rankings (73rd among 116 countries), it is quite obvious that in order to enhance the competitiveness of the business environment for local and foreign companies Azerbaijan will have to advance in both directions.
D. Competitiveness in Individual Parameters of the Business Environment
The conditions for business are diverse and encompass virtually all parameters of the economic system. All of them influence the operation of enterprises to a greater or lesser extent, and it is only their combined effect that creates the overall environment for business activities. Each factor is important in its own way, which is why the world’s countries now compete among themselves even in individual parameters of the business environment. National competitiveness in a given parameter of the business environment should be taken to mean whether this parameter is sufficiently “friendly” to enterprises operating in the country (both residents and foreign companies) compared to other countries.
Ireland, for example, believes that one of its essential competitive advantages is a low corporate tax, established in 2003 at 12.5%. It has the lowest corporate tax rate in the European Union and one of the lowest in the world.17 Non-EU countries find it more profitable to move their production of goods and services designed for sale in the EU market to Ireland. As a result, Ireland gets a huge inflow of foreign investment, especially from the United States, while U.S. economists are concerned about their own uncompetitively high rate of corporate tax.
At the same time, in view of two processes underway in Europe, Ireland’s competitive advantage in corporate tax is gradually losing its former significance. First, in recent years many European countries have also reduced their corporate tax rates. And second, the European Union is actively discussing the prospect of a unified corporate tax rate, whose introduction would naturally reduce the autonomy of EU countries in matters of tax policy and, accordingly, the advantage that some states have today; at any rate, within the EU this advantage would be eliminated. That is why Ireland, like many other states in the world, is now trying to find and implement regulatory mechanisms that would provide it with new (or additional) advantages in competition over the quality of the business environment.18
National competitiveness in various parameters of the business environment lends itself to comparative analysis more readily than competitiveness in the overall business environment indicator. In particular, to assess competitiveness in corporate (profit) tax it is enough to compare the top rate of this tax in different countries, as is done in Table 8. In this ranking, countries are assigned higher places for lower corporate tax rates.
Table 8
Corporate Tax Ranking (CIS ar id Some Other Countries, 2007)19
Rank Country Tax (%) Rank Country Tax (%)
1-7 United Arab Emirates 0.0 37-39 Russian Federation 24.0
1-7 Estonia 0.0 40-60 Iran 25.0
8-10 Kyrgyz Republic 10.0 40-60 Tajikistan 25.0
11-12 Uzbekistan 12.0 40-60 Ukraine 25.0
13 Ireland 12.5 74-104 Kazakhstan 30.0
14-19 Moldova 15.0 74-104 Turkey 30.0
27-34 Armenia 20.0 74-104 United Kingdom 30.0
27-34 Georgia 20.0 117 France 33.8
27-34 Turkmenistan 20.0 119-147 United States 35.0
35 Azerbaijan 22.0 154 Libya 40.0
37-39 Belarus 24.0 155 Chad 45.0
17 A detailed analysis of Ireland’s tax advantages is given, in particular, in a joint report by Ireland’s government agency Forfas and its National Competitiveness Council: Annual Competitiveness Report 2006, Vol. 1, Benchmarking Ireland's Performance, available at [http://www.forfas.ie/ncc].
18 See, for example: Annual Competitiveness Report 2006, Vol. 2, Ireland's Competitiveness Challenge, p. 4, available at [http://www.forfas.ie/ncc].
19 Compiled from the data of the Heritage Foundation [http://www.heritage.org/research/features/index/ searchresults_var.cfm].
In seven countries (Bahrain, Qatar, Kuwait, United Arab Emirates, Saudi Arabia, Estonia and the Bahamas), there is either no corporate tax at all or it is equal to zero. The enterprises of Libya and Chad have to operate in the worst conditions in the world as regards corporate tax: in these countries it equals 40% and 45%, respectively, which inevitably leads to mass tax evasion. Azerbaijan, where corporate tax is levied at a rate of 22%, falls into the “middle” category: it is 35th in the world ranking and 7th among the CIS countries. This means that in terms of corporate tax Azerbaijan offers its enterprises much more competitive conditions than, say, the United States but less competitive than Georgia.
Compared to rankings in the overall business environment indicator, a ranking in one component (in this case, corporate tax) has a flaw in that it is insufficiently representative, but its advantage is that it is based on a direct and not a calculated indicator. In some cases, it helps to get a better idea of the strengths and weaknesses of a country’s competitiveness and to formulate more concrete recommendations for the government.
In discussions about the economic successes achieved by Ireland over the past few decades, a question that often arises in this context is what kind of resources, including natural resources, Ireland actually possesses. As it turns out, the answer is quite simple: among other things, it has a corporate tax rate that is low enough to operate as a national competitive advantage.
Global Competitiveness Index (GCI)
In 2005, the WEF developed another indicator of national competitiveness: the Global Competitiveness Index.20 This was necessary, in the authors’ opinion, because the growth and business competitiveness indexes did not fully reflect all the factors and drivers of national competitiveness. They thought it necessary to extend the list of these factors so as to be able, first, to make a more detailed description of the economic environment for business activities and, second, to broaden the range of countries and regions assessed.
In particular, it is difficult to make a sufficiently deep analysis of the reasons behind the relatively weak economic growth in the developed EU countries without a special examination of problems related to the sectoral structure of their economy.
The Growth CI does not cover such matters as the flexibility of the labor market or the efficiency of various market segments. Or take the steadily growing importance of such factors as the quality of education and training, which have a direct influence on the rate and pattern of economic growth in the long term. The ability of a country to absorb new technologies and produce goods and services meeting world standards and enabling it to compete in international markets is directly connected with the number and quality of its educational, training and scientific research institutions.
The Global Competitiveness Index takes fuller account of all these factors than the growth and business competitiveness indexes, in effect combining both of them.
The GCI is based on nine “pillars,” each of which is critical to the efficiency and competitiveness of the national economies. Apart from the components assessed in the Growth CI and the BCI, they include a number of new components. The key factors of competitiveness are as follows:
■ institutions (quality of public institutions);
■ infrastructure (its extent and quality);
■ macroeconomy (macroeconomic climate);
■ health and primary education;
20 Another version of country competitiveness rankings is published annually by the International Institute for Management Development (IMD) based in Lausanne (Switzerland). Its publication, The World Competitiveness Yearbook, is regarded as one of the most competent comparative analysis works on the competitiveness of countries and regions. However, the Yearbook compares only 55 countries and does not cover the countries of the Central Caucasus.
■ higher education and training;
■ market efficiency (goods and services, labor and financial markets);
■ technological readiness (agility in adopting existing technology);
■ business sophistication (networks and supporting industries, sophistication of firms’ operations and strategy);
■ innovation.
Given that the role and importance of factors contributing to competitiveness are not the same at different stages of economic growth, the authors have divided all countries into three groups depending on what drives their economic growth: factors of production, productivity (efficiency) or innovation.
In economic systems that are in the first stage of development (factor-driven economies), companies mostly compete on the basis of prices, using lower prices for factors of production as an advantage. In the second stage (efficiency-driven economies), companies mostly use efficient production processes enabling them to increase productivity. In the third stage (innovation-driven economies), companies compete through innovation, using the most sophisticated production processes and methods to produce new goods.21
Based on this classification, the nine pillars are divided into three sets, each typical of a particular stage of development. The first four pillars (institutions, infrastructure, macroeconomy, health and primary education) are designated as “basic requirements” and are critical to countries in the first, factor-driven stage. Pillars 5-7 (higher education and training, market efficiency, technological readiness), designated as “efficiency enhancers,” are of greater importance to countries in the second stage, and the last two pillars (business sophistication, innovation), to countries in the innovation-driven stage. Each set of pillars provides the basis for calculating one of the three subindexes used to determine the overall Global Competitiveness Index.
The countries are allocated to stages of development using gross domestic product (GDP) per capita: countries in the first stage have up to $2,000; in the second stage, $3,000-9,000; and in the third stage, over $17,000. Countries with GDP per capita ranging from $2,000 to $3,000 and from $9,000 to $17,000 are considered to be “in transition” from the first to the second group and from the second to the third group, respectively. The countries of the Central Caucasus are placed in the first group.
Although the most important role in enhancing the competitiveness of countries in different stages of economic development is played by one particular set of pillars, for a complete assessment it is necessary to take into account the influence of other sets as well. The only thing is that these sets have a different importance depending on the basis for the country’s competition in the international market. That is why the weight (importance) of competitiveness subindexes differs depending on the country’s development stage. By introducing the notion of countries “in transition,” the authors seek to ensure a smooth change in the weights of the three subindexes (one can say that the countries of the world are in effect divided into five groups).
Basic requirements Efficiency enhancers Innovation and sophistication factors
Stage 1: factor-driven competitiveness 50% 40% 10%
Stage 2: efficiency-driven competitiveness 40% 50% 10%
Stage 3: innovation-driven competitiveness 30% 40% 30%
21 This classification is somewhat different from the above-mentioned classification of Michael Porter.
Using this methodology, the WEF ranked 125 countries in the GCI. A sample of these rankings is given in Table 9.
Table 9
Global Competitiveness Index and Subindex Rankings (ECA Developing Countries, Best and Worst Performers)22
Subindexes
Overall index rank Country Overall index score Basic requirements Efficiency enhancers Innovation factors
Rank Score Rank Score Rank Score
1 2 3 4 5 6 7 8 9
1 Switzerland 5.81 5 б.02 5 5.59 2 5.89
2 Finland 5.7б 3 б.10 4 5.б0 б 5.б5
3 Sweden 5.74 7 5.95 2 5.б5 5 5.бб
25 Estonia 5.12 30 5.31 19 5.18 32 4.24
29 Czech Republic 4.74 42 4.89 27 4.73 27 4.47
33 Slovenia 4.б4 3б 5.17 30 4.58 34 4.18
3б Latvia 4.57 41 4.90 3б 4.48 58 3.74
37-38 Slovak Republic 4.55 47 4.70 34 4.5б 43 3.9б
40 Lithuania 4.53 45 4.80 38 4.44 44 3.9б
41 Hungary 4.52 52 4.б4 32 4.57 39 4.08
48 Poland 4.30 57 4.59 48 4.17 51 3.80
50-51 Croatia 4.2б 55 4.б0 52 4.07 50 3.81
5б Kazakhstan 4.19 51 4.б4 5б 3.97 74 3.51
59 Turkey 4.14 72 4.34 54 4.02 42 3.9б
б2 Russian Federation 4.08 бб 4.43 б0 3.91 71 3.55
64 Azerbaijan 4.06 56 4.59 78 3.52 70 3.59
б8 Romania 4.02 83 4.19 55 3.99 73 3.52
72-73 Bulgaria 3.9б б2 4.50 70 3.б7 85 3.2б
77-78 Ukraine 3.89 8б 4.15 б9 3.б8 78 3.47
80 Macedonia 3.8б 70 4.37 80 3.47 87 3.24
82-83 Armenia 3.75 81 4.21 88 3.33 93 3.17
Table 9 (continued)
Overall index rank Country Overall index score
1 2 3
85 Georgia 3.73
8б Moldova 3.71
87-88 Serbia and Montenegro 3.б9
89-90 Bosnia and Herzegovina 3.б7
9б Tajikistan 3.50
97-99 Albania 3.4б
107 Kyrgyzstan 3.31
124 Burundi 2.59
125 Angola 2.50
Subindexes
82
Score Rank Score Rank Score
5 6 7 8 9
4.20 87 3.3б 113 2.8б
4.09 85 3.38 98 3.09
3.87 72 3.б3 83 3.27
4.24 93 3.22 99 3.08
3.94 103 3.07 103 3.02
3.98 99 3.12 121 2.57
3.5б 102 3.08 108 2.93
2.б8 124 2.4б 118 2.б
2.48 123 2.51 123 2.52
88
99
78
94
92
109
124
125
Basic
requirements
Efficiency
enhancers
Innovation
factors
The top ten most competitive countries in the world are Switzerland, Finland, Sweden, Denmark, Singapore, United States, Japan, Germany, Netherlands and United Kingdom. Estonia is regarded as the most competitive country among the ECA developing countries, and Kazakhstan in the CIS. Azerbaijan ranks 64th in the world and has fairly good positions in its own region. It should be noted that regional comparisons in these rankings are more important than in many others, because countries primarily compete with neighboring states. Azerbaijan ranks 3rd in the CIS and 13th in the ECA region.
Since the importance of various factors driving a country’s competitiveness is determined by its economic development level, there are also different ways of boosting the GCI. For low-income countries, including Azerbaijan, the main ways to raise the level and quality of competitiveness23 are as follows: at the enterprise level, to upgrade production processes based on advanced technologies, marketing research and strategic (long-term) planning; at the national level, to upgrade the physical and “soft” infrastructure and enhance the quality (optimize the objective function and increase the effectiveness) of economic policy. In the coming years, Azerbaijan should focus its efforts in these areas.
C o n c l u s i o n
Globalization has changed the world. Competition has changed as well, and its measurement across countries is now much more topical than only a few decades ago. An absolute majority of states in the world are trying to find, implement and develop sectors and lines of production that
23 The quality of competitiveness in this context is taken to mean a renunciation of competitive advantages based on cheap labor and natural resources and a transition to a higher stage driven by investment and efficiency.
could give them a comparative advantage over others. The countries of the Central Caucasus, including Azerbaijan, are also faced with the prospect of hard work (primarily intellectual work) aimed at strengthening their competitive advantages. Their natural advantages due to natural resources, geographical location and other given parameters of social development should be regarded only as initial advantages. Based on these potential advantages, it is necessary to develop those sectors of the economy which can provide a sound basis for the country’s actual and sustainable competitiveness.
Vladimer PAPAVA
D.Sc. (Econ.), professor, Senior Fellow at the Georgian Foundation for Strategic and International Studies, a Senior Associate Fellow of the Joint Center of the Central Asia-Caucasus Institute (Johns Hopkins University-SAIS) and the Silk Road Studies Program (Uppsala University)
(Tbilisi, Georgia).
Micheil TOKMAZISHVILI
D.Sc. (Econ.), professor, Member of the Board of National Bank of Georgia, Senior Expert at the Case Transcaucasus, Gender Budgeting Consultant at the UNDP Gender and Politics Program in the Southern Caucasus
(Tbilisi, Georgia).
NECROECONOMIC FOUNDATIONS AND THE DEVELOPMENT OF BUSINESS IN POST-REVOLUTION GEORGIA
Abstract
After fifteen years of economic transformations we can conclude that the transition period in Georgia and many other post-communist countries has ended but, unfortunately, the economic (and not only economic) system is far from the Western style of capitalism. It is better characterized as “post-communist capitalism.” The key reason is the “necroecon-omy.” The collapse of the communist re-
gime and the breakdown of the command economy revealed that, with rare exceptions (hydroelectric power, mining and primary processing of raw materials), the goods produced in these countries were incompatible with international standards and could not compete with Western products. Only an efficient bankruptcy law is an effective tool against necroeconomy. In transition countries, including Georgia,
