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potential, to think about its competitive advantages. It is important that Azerbaijan accedes to the WTO not just as a raw materials provider, but as a strong and diversified trade partner with a competitive national economy, capable of offering an attractive and rewarding business climate for foreign investments, as well as for its own products on international markets.
Iza NATELAURI
D.Sc. (Econ.), head of the Microeconomics Department, Paata Gugushvili Institute of Economics, associate professor, Ivane Javakhishvili Tbilisi State University (Tbilisi, Georgia).
GEORGIA’S EXTERNAL SECTOR: CURRENT STATE AND PROBLEMS
Abstract
During the transformation of Georgia’s economic system, when politics has absolute priority over economics, the external sector performs a universal func-
tion and operates as an independent factor contributing to the balanced development of the country’s economy. Such are the questions examined in this article.
I n t r o d u c t i o n
In the economic reality of modern Georgia, the most difficult and vitally important problem is how to optimize the performance of the country’s external sector.
The current importance and difficulty of this problem is due to a number of circumstances: first, the sphere of foreign economic relations, compared to other areas of the economy, is more (and in some cases totally) politicized. Second, the very subject of investigation—the external sector—is extremely multifaceted:
(1) it has macroeconomic and microeconomic aspects;
(2) it includes trade in goods and services;
(3) foreign economic relations are maintained within the framework of individual enterprises (joint ventures) and in certain territories (special economic zones), on a bilateral basis (cooperation between partner countries), within integration groupings, and on a multilateral basis with supervision, monitoring and control by international economic organizations (IMF, World Bank, WTO, U.N.);
(4) the sector includes currency and financial relations, intercountry exchange of production factors (capital, labor, technology), and also information support, management, accounting and reporting, etc.
Based on the above, we will try to analyze Georgia’s external sector and its structure, to identify the specific features of its operation, and to determine its development trends.
1. General Overview of the Georgian External Sector
The external sector is the aggregate of regulation and control forms and methods, areas of foreign economic relations, and their participants.1 It is based on foreign experience and the use of comparative advantages intrinsic to the international division of labor, helping the country to achieve its economic and political goals. Foreign economic relations are regulated by means of tariff, nontariff, financial and noneconomic methods. These relations can be examined along the following lines:
(a) relations between countries with similar and different sociopolitical systems;
(b) relations between members of international economic organizations; and
(c) relations between members of integration groupings.
Foreign economic partners include individuals and legal entities that are involved, in one form or another, in foreign transactions, perform foreign operations or exercise their control, regulation, etc. The external sector is a major component of the country’s economic system, which determines the specifics of the sector’s development in accordance with its own current goals and requirements.
In creating the external sector, whose foundation was laid in 1992, it was necessary to take into account the following distinctive features of Georgia:
(1) The republic is a transition country with a favorable geographical location and certain geopolitical advantages;
(2) for a number of years it developed as part of the U.S.S.R., a territorially large, resource-rich, and economically and politically strong state;
(3) Georgia’s foreign economic relations are oriented toward creating a small and open economic system;
(4) the Georgian state has the necessary starting conditions to create such an economic model;
(5) Georgia is in need of certain foreign trade concessions and close cooperation with international economic organizations.
Of all the traditional forms of foreign economic relations, Georgia prefers to develop foreign trade; other promising avenues are scientific and technical cooperation and foreign tourism. Georgia also has some experience in setting up joint ventures: for several years, active work has been carried on in the country to validate the feasibility of creating special (free) economic zones (SEZs). As regards currency and financial relations, the focus here is on purchase and sale of currencies, trade credits, migrant remittances, external debts and grants.
1 The essential aspects of the external sector are examined in: I. Natelauri, The Operation and Development of the External Sector in a Transition Country with a Small Open Economy (A Case Study of Georgia), Metsniereba, Tbilisi, 2004 (in Georgian).
Special attention should be paid to Georgian imports of goods. Since 1992, this indicator has increased from year to year. Imports mostly consist of oil products, pharmaceuticals, sugar, flour, electricity, wheat, passenger cars, etc. Export earnings from raw materials (iron-and-steel scrap, ferroalloys, raw gold, copper ore, etc.) do not cover the costs of importing consumer goods. This state of affairs and the current trends will continue until the problems of operation and development of the economic system come to the fore. The fact that priority in Georgia is given to politics results in a low rate of economic growth, high unemployment, a tense social situation, a fixed exchange rate, and chronically large trade and current account deficits. In addition to the trade deficit, we find an adverse export-import structure: exports of raw materials and imports of consumer goods. At the same time, it should be noted that imports of consumer goods are currently of great importance to the Georgian state, because they are in large part responsible for the future of the sociopolitical system in the country. The present political, social and economic situation determines the specific features of government regulation of the republic’s foreign economic relations. The government is obliged to pursue a protectionism foreign economic policy. Georgia maintains economic relations on a bilateral and multilateral basis, coordinating its foreign economic policy with international economic organizations (IMF, World Bank, WTO) of which it is a member. It should be noted that the methods used to regulate and control foreign economic relations in Georgia are primitive, while tariff mechanisms are almost entirely confined to the unified import tariff.
The republic’s geography and its foreign partners in economic relations are a subject of special investigation. In recent years, Georgia has actively cooperated with a diversified range of partner states, both developed and developing, and also with transition countries (including post-Soviet states). Each individual country’s economic relations with Georgia differ from the rest by specific mutual requirements and obligations, by the forms, principles and results of cooperation.
2. Georgia’s Bilateral and Multilateral Ties and Transformation of the Economic System
The top ten partner countries actively cooperating with Georgia include Turkey, Azerbaijan, the United States, Russia, Germany, Britain, Switzerland, Ukraine, Italy and Bulgaria.
In the past, for many years Russia was a major trading partner of Georgia. Georgian-Russian relations—political, economic, cultural and religious—are of a historical nature and deserve special attention, both from the standpoint of past traditions, current requirements and future prospects. For many years, Georgia and Russia were part of a single territorially large, politically and economically strong state; both have the status of transition countries and seek to create open economic systems. The share of imports from Russia in total Georgian imports is gradually diminishing. Nevertheless, according to the Statistics Department of the Georgian Ministry of Economic Development, the degree of Georgia’s economic dependence on Russia remains high. In addition, “Georgia’s cooperation with partner countries, including Russia, in the matter of creating special economic zones (SEZs) is once again coming into sharp focus. It is known that the Georgian government has discussed the feasibility of creating SEZs in post-conflict areas bordering on Russia for the purpose of their social and economic rehabilitation. There is a competent opinion that special economic zones, taking into account the interests of legal and illegal business circles, will help to settle political conflicts and to resolve economic and social problems in post-conflict areas in Georgian territory. In these processes, the role and place of Russia as Georgia’s strategic partner are, in our opinion, undoubtedly large. At the same time, we believe that the creation of free eco-
nomic zones in the border areas of these countries will benefit both states, especially given the close and longstanding bilateral trade and economic relations between the border areas of Georgia and Russia, the closeness of traditions, etc. Economic interdependence, territorial proximity and the current social situation call for cooperation involving preferential treatment and based on rules of international cooperation available only in SEZs.”2
Apart from the Russian Federation, other partners of Georgia from among the transition countries are Ukraine and Azerbaijan. Georgia and Ukraine together have a better chance of gaining access to Europe than each of them separately. As regards Georgia’s economic ties with Azerbaijan, the territorial proximity of the two countries provides them with wider opportunities to take part in the TRACECA project, whose expected socioeconomic effects are of great importance to both of them. The Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Supsa oil pipelines are examples of successful cooperation between Georgia and Azerbaijan.
A special place among Georgia’s partners from the developed world belongs to the United States, Britain and Germany. Under the TRACECA project, the United States has undertaken to protect the security of the Euro-Asian transportation corridor. Financial aid provided by these states plays a significant role in maintaining a macroeconomic equilibrium in Georgia and regulating its balance of payments deficit.
Since Georgia became independent, its political and economic ties with neighboring Turkey (exchange of goods and services, joint ventures, regional and strategic cooperation) have strengthened. As soon as the republic opened its borders, it began trading with Turkey, exporting metals, timber, electricity and other raw materials mostly in return for consumer goods. Many joint ventures have been set up in Georgian territory with partners from the Republic of Turkey.
Georgia has also actively cooperated with international organizations, membership in which enables it to win international recognition and to use their experience in achieving macroeconomic stability, conducting reforms and looking for ways to integrate into the world economy.
The International Monetary Fund and the World Bank encouraged the republics of the former Soviet Union, including Georgia, to join their ranks. Using the ideas of market economics, they helped: (1) to protect the economic (as well as the social and political) systems of the member countries from unforeseen (unpredictable) influences; and (2) to dismantle the Soviet economic system.3
As we know, an economy can have a production, sales, market and marketing orientation. A production-oriented economy is characterized by a desire to maximize production capabilities: to keep enhancing product quality, increasing output, improving performance indicators, etc., while taking little account of the wishes and possibilities of consumers. In a sales-oriented economy, the main task is to sell the goods produced with the use of advertising and other methods, and in a market-oriented economy production is mobilized to produce goods that are in particular demand among consumers. In a marketing-oriented economy, we find the fullest possible realization of the production potential based on comprehensive and well-founded market analysis, planning and forecasting.
In the Soviet period, the Georgian economy was part of the centralized administrative system and had a production orientation. After independence, there was an active discussion, through consultations with well-known experts and international organizations, of the question of transition to a market-oriented economy. We often hear that the administrative economy in Georgia has been replaced by a market economy, but it should be noted that centralization, administration and mandatory performance of tasks are only forms of influence and not characteristic features of economic systems.
2 G. Tsereteli, I. Natelauri, N. Bibilashvili, “Voprosy ekonomicheskogo sotrudnichestva Gruzii i Rossii,” Izvestia AN Gruzii (economic series), Nos 3-4, 2005, pp. 107-113.
3 See: V. Papava, MVF v Gruzii: dostizhenia i oshibki, Imperial, Tbilisi, 2000; I. Natelauri, “Natural Development of Economic Systems,” Progress, Nos. 1-2, 2001, pp. 65-67 (in Georgian).
They are used in economies of any orientation, depending on the concrete socioeconomic and sociopolitical conditions in the country. So, instead of a replacement of the administrative-command economy by a market economy, in actual fact the republic made a transition from a production-oriented to a market-oriented economy, bypassing the sales-oriented economy. This process, for its part, revealed the limited possibilities of the economic system as a whole, including the enterprise level: independent sale or supply was impossible, real prices were unknown, and there was no experience in independent management, coupled with uncontrolled movement of goods, mostly across the state border, plant closures, growing unemployment, inflation, and a difficult social situation. The conclusion to be drawn from the above is that the current economic (and not only economic) situation is the result of a deviation from the natural path of development.
In view of the fact that in a market-oriented economy supply is prompted and balanced by demand, while in a production-oriented economy the latter is neglected, what we needed was a sales-oriented economy in order to gain the necessary knowledge and experience in matters of demand (or, more precisely, in matters of fostering demand) with a subsequent transition to a market-oriented economy.
Hence a natural question: what would we have gained by selecting the path of a sales-oriented economy, and what would we have lost of the things we have achieved by choosing a market-oriented economy (by making a leap)? The answer is obvious: we would not have lost anything but, on the contrary, would have probably avoided the imposed socioeconomic and sociopolitical problem related to the fact that the specific features of the operation of strategic industries were not taken into account.
Besides, foreign assistance and support for the economy are necessary not only in the case of selection of a sales-oriented economy, but also in the case of a backward production-oriented economy.
So, the main task of the initial stage is to assess the real possibilities of the production-oriented economy while paving the way for a transition to a sales-oriented economy. By giving priority to this path, we could have avoided many negative consequences. For example, the domestic market would not have been filled with such large amounts of expensive and low-quality imports, jobs would have been retained, the scale of migration would have been smaller and, most important of all, such a complicated social atmosphere and conflict situations would not have arisen.
So, it is necessary to avoid all kinds of “leaps” in development and to closely cooperate with a diversified range of partners and international organizations. Georgia needs not only financial aid from abroad, but also support and assistance in promoting the sale of its products.
C o n c l u s i o n
The reforms underway in Georgia highlight the importance of foreign economic relations (especially imports), methods of their regulation, and choice of partner countries and international organizations taking an active part in the transformation of the country’s economic system.
The Georgian external sector performs a universal function and is an independent factor contributing to balanced economic development.
As is evident from the above, the main goals of the operation and development of the external sector are to achieve a higher level of economic growth and employment, reduce the trade and payments deficits, ensure a stable exchange rate, etc. In Georgia these goals will be achieved only when the economy comes to be regarded as a priority.
