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C o n c l u s i o n
In the global economy, energy security means more today than simply protecting fields, refineries, and pipelines from terrorist acts. The world is facing the prospect of divvying up energy resources anew, so far it is a cold war among those who have energy resources and those who do not have enough. In this sense, hydrocarbon resources are being used as a “political bargaining chip” and this capital must be used with great care and perspicacity. The countries of the Caspian region, including Azerbaijan, are succeeding in this so far.
The positive side of having enormous resources is primarily accelerated integration into the world economic and financial system, technological rearming of the basic industries, and investment of significant funds into science, technology, and education.
Rozeta ASATIANI
D.Sc. (Econ.), professor, Tbilisi Institute of Market Economy and Law
(Tbilisi, Georgia).
POST-COMMUNIST TRANSITION PERIOD IN THE GEORGIAN ECONOMY
Abstract
T
his article analyzes the initial conditions and mechanisms of the postcommunist transition period and ex-
amines the specific features and stages of economic reforms in Georgia in 19912008.
I n t r o d u c t i o n
The breakup of the U.S.S.R. and the related serious changes in the global political and economic space confronted the post-communist countries with the need to address a complex and unusual task unprecedented in world history: the task of transition from the command economy to a market economy. In Georgia, as in other countries of the Central Caucasus,1 the Soviet period is also known as the time of a 70-year socialist experiment.
The Soviet Union was a country with dominant state ownership (90%) and a rigid vertical structure of administrative command, with a dictatorial regime and disrupted horizontal relations. The
1 See: E. Ismailov, V. Papava, The Central Caucasus: Essays on Geopolitical Economy, CA&CC Press, Stockholm, 2006.
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logical result of this was a closed, “shortage” economy, mainly resource-intensive production of the extensive type with low economic growth rates. Of course, in some areas—education, science, culture, space exploration, nuclear power industry, metallurgy, aviation, etc.—the country achieved significant successes. But they were obviously insufficient to decide the fate of the competition between capitalism and socialism. In 1990, GDP per capita in the Soviet Union ($5.5 thousand) was almost 3.5 times smaller than the figure for the developed countries ($19.80 thousand) and 4.5 times smaller than the U.S. figure ($24 thousand), although it was 2.5 times larger than the same indicator for the developing countries ($2.15 thousand).2 In 1990, GDP growth in the Soviet Union (at 1982 prices) was negative and amounted to 2.2%.3
The 1990s as the Beginning of a New Era in Georgia
The collapse of “barracks socialism” in the East European countries and in the Soviet Union, nearly paralleled by the latter’s disintegration, which resulted in the emergence of independent states seeking to create a new economic system, was one of the most unprecedented phenomena of the 20th century. The well-known American economist John Kenneth Galbraith ranked this event among the three greatest events of the 20th century along with the two world wars.4 It triggered profound transformation processes and raised qualitatively new problems whose solution goes beyond the limits of the classical schemes developed by economic science throughout its entire previous history.5 Hence it is logical that the post-communist countries, including Georgia, entered a new type of transition period without parallel in the history of world civilization.
Whereas the transition from wild capitalism to a market economy was based on an economic theory already developed by John Maynard Keynes in the form of a “general theory of employment, interest and money,” the transition from state-monopoly socialism to a market system began spontaneously against the background of a disintegrating economy and without a proper economic theory adapted to the existing situation. When the Western countries began constructing a market economy, they had the necessary initial conditions, whereas in Georgia and other post-communist countries in the 1990s such conditions were virtually absent.
The referendum of 31 March, 1991, and the restoration of state independence radically changed Georgia’s course of development not only in the political, but also in the economic and ideological spheres. Georgia joined the process of progressive changes underway in the world economy. From the very beginning it faced a difficult task: to create appropriate conditions for a painless transition from state-monopoly socialism to a market economy. Meanwhile, the old economic system in Georgia began to disintegrate overnight, without any preparation. Matters were complicated by unfavorable initial conditions and low economic potential, and also by internal strife, the division of society into mutually antithetic parts, and a war to preserve the country’s territorial integrity. All of this has naturally had a negative effect on the final results of economic transformation.
A significant role in Georgian economic conversion was played by international organizations: the International Monetary Fund, World Bank, European Union, and others. Their recommendations
2 See: B. Bolotin, “Mezhdunarodnye sravnenia: 1990-1997,” ME i MO, No. 10, 1998, p. 120.
3 Calculations of the U.S. Central Intelligence Agency (see: “Sovetski ekonomicheski rost: ofitsialnye dannye i al’ternativnye otsenki,” Voprosy ekonomiki, No. 10, 1995, p. 106).
4 See: J.K. Galbraith, “Economics in the Century Ahead,” in: The Future of Economics, Oxford, Blackwell, 1992,
p. 17.
5 See: V. Papava, Necroeconomics. The Political Economy of Post-Communist Capitalism, I Universe, New York, 2005, pp. 12-17.
and proposals were basically analogous to the reforms being implemented in the post-socialist countries, especially in Russia, and did not take into account Georgia’s peculiarities, its national interests or the difficult socioeconomic situation in the country. This policy was also to some extent justified, because at the beginning of the reforms Georgia was in the ruble zone and did not have a national currency, which prevented it from implementing reforms based on its own model.
The systemic transformation processes launched in Georgia along with political processes spanned across the economic, social, cultural and other spheres. It was clearly stated that the strategy for the transition period was to create a mixed economic system and go over to a market economy.
The success of socioeconomic transformation depended in large part on the mechanism for regulating economic processes, a correct assessment of the country’s potential, the level and quality of the institutionalization process started in the country, etc. As it turned out, the government was unprepared to coordinate these systemic reforms, to develop effective control mechanisms or protect the economy from dogmas imposed from outside. On the contrary, in that difficult situation the state quite illogically confined itself, to use Adam Smith’s metaphor, to performing the functions of a “night watchman” and let economic processes take their course. We turned toward pure liberalism when the developed countries had already turned away from it. “Minimal government” in economic policy is now a thing of the past for the civilized world. The state’s economic role in Georgia was absolutely minimized. Add to this the grave legacy of the past. Criminal activities intensified. A specific—consumerist—attitude to the fatherland came to the fore. Many criminals found their way into the upper echelons of power. Against the background of a civil confrontation in the extreme situation of the emergence of a new economic system, the key role was assigned to economic liberalization.
Models of Transition to a Market Economy and Macroeconomic Stabilization
The success or failure of reforms depends to a large extent on the model chosen by the country at the initial stage of economic reform. In this sense, world practice has advanced “shock therapy” and the gradualist model.
Shock therapy implies, first and foremost, accelerated transformation through shock treatment and is mainly based on the following principles: lifting of price controls, rapid price and foreign trade liberalization on the basis of free pricing, denationalization of property and creation of private property, minimization of the state’s economic role, etc. It is characterized by excessive radicalism as expressed in a dismantling of the existing economy, in its destruction by different methods. This way of transition to a market economy is not meant to develop the country’s production potential. Its main goal is to liberalize the economy, achieve financial stability, and minimize the budget deficit.
The gradualist model focuses on a transformation and renewal of state institutions with a significant retention of the state’s role in the economy, promotion of national production, preservation of state monopolies in key sectors, etc. Based on elements of the old economic system, it implies gradual evolutionary transformation. That is why this gradualist (evolutionary) model is also known as struc-tural-production macro stabilization. It differs radically from other models of macroeconomic stabilization and is designed to develop the country’s production potential and enhance the competitiveness of domestic products.
Out of these two models of transition to a market economy, Georgia chose shock therapy. This model, also known as the Big Bang approach, was implemented based on the “Washington Consen-
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sus” and proved to be non-optimal for Georgia. It is no accident that shock therapy received a negative assessment from the “Post-Washington Consensus” itself, and the emphasis in post-communist countries was shifted to the new role of the state.
In the structure of systemic economic transformation, macroeconomic stabilization plays a decisive role. Without such stabilization, institutional, micro and macro economic transformations, as well as other components of systemic transformation, are distorted. Indeed, institutional transformations (denationalization of property, development of a new legislative framework, creation of a market infrastructure, resource markets, goods and services markets, etc.), and also price liberalization, demonopolization of the economy, antimonopoly regulation, liberalization of foreign economic relations, transition from a closed to an open economy, etc., depend in large part on macroeconomic stabilization. Under macroeconomic instability, market infrastructure institutions take a clearly speculative turn; price liberalization can develop into hyperinflation, and so on. Macroeconomic stabilization, for its part, cannot be achieved without institutional, micro and mega economic transformations.
World practice knows the following major models of macroeconomic stabilization: orthodox, heterodox and structural-production.
Under the orthodox approach, the emphasis is on reducing the state budget through cuts in public spending (on public administration, defense, social protection, government transfers, subsidies, investments, etc.). It is characterized by a tightening of fiscal policy, reduced tax breaks, an increase in taxes, etc. Tight fiscal policy is coupled with a tightening of monetary policy, which is reflected in “dear money” policy. This is expressed in limited issue of currency by the central bank, higher interest rates, rising reserve requirements for banks, etc.
In orthodox macroeconomic stabilization there are two ways of selecting economic stabilizers (so-called “anchors”): in the first case, the emphasis is on limiting the amount of national currency in circulation, i.e., on a “monetary anchor” based on monetary methods. This includes a tight fiscal and monetary policy coupled with a floating exchange rate, when anti-inflation measures are confined to reducing aggregate demand and restricting the money supply. In the second case, the emphasis is on stabilizing the exchange rate by establishing a fixed rate or a currency band, i.e., on an “exchange rate anchor.” These measures help to reduce inflation expectations, to anticipate the economic behavior of market actors, etc. The emphasis here is on foreign currency (mainly the dollar) and on maintaining exchange rate stability.
Thus, the orthodox macroeconomic stabilization model is an expression, on the one hand, of monetary policy (monetary anchor), and on the other, of a fixed exchange rate (exchange rate anchor). In a weak economy, this creates significant problems such as low investment and business activity, a decline in the scientific and technical potential, a deepening payment crisis, reduced opportunities for expanding production, a drop in the share of domestic products in the national market, a shrinking tax base, falling budget revenues, declining national economic security, etc.
The heterodox approach focuses on “freezing” income and prices. It is also known as the “third anchor” of financial stabilization in economic theory and practice. This model, especially in the form of a “shock,” creates a quick anti-inflationary effect but produces negative results as well: value signals are distorted; incentives to develop production disappear; the threat of a goods shortage appears on the horizon, etc. The heterodox model combines the principle of rapid financial stabilization characteristic of shock therapy with the principle of fixed and temporarily frozen prices. Its strategy implies a mechanical combination of the main postulates of neoliberal and neo-Keynesian theories.6
The third macroeconomic stabilization model is structural-production stabilization. In contrast to shock therapy, this is a gradualist, evolutionary approach. It is characterized by a more
6 See: J. Stiglitz, “More Instruments and Broader Goals: Moving Toward the Post-Washington Consensus,” available at [http://www.rep.org.br/pdf/73-5.pdf].
active economic role of the state with the use of well-tried regulatory methods coupled with a progressive structural and investment policy, retention of government control over the key sectors of the economy, modernization of production, protection of local producers, promotion of scientific research, etc.
A good example of gradualism is modern China, which has launched a massive modernization of its economic production potential on market principles; by means of an active structural, production and investment policy, it ensures a renewal of production facilities, while its efforts to reduce production costs and improve product quality serve to enhance the competitiveness of domestic products and to increase aggregate supply, which ultimately produces an anti-inflationary effect. At the same time, China is working to increase aggregate demand, which simultaneously provides a basis for addressing social problems. It should be noted that the share of domestic investment in China’s GDP is high, reaching 40%.
Structural-production stabilization programs lead to an easing of credit restrictions and provide opportunities for monetary expansion, and this poses a threat of faster inflation. At the same time, inflation can be kept in check by tightening control over monetary expansion, as expressed in control over natural monopoly prices, development of cashless payments, and constant attention to macroeconomic dynamics in general. Moreover, inflation created in this way is short-term. It manifests itself only at the initial stage, gradually abating with a recovery in production.
Consequently, financial stabilization achieved in this way differs significantly from liberal monetarist policy. The main thing is that it provides an opportunity to saturate the market with domestic products while ensuring the country’s economic security. Naturally, the implementation of the structural-production model faces a number of obstacles. This includes the need for funds to achieve the said goal, a fairly long waiting period, a high risk of inflation, and strong bureaucratic barriers associated with the implementation of adopted decisions.
Our brief survey of macroeconomic stabilization models suggests the following conclusion: Georgia’s macroeconomic policy of transforming (converting) the economy was oriented toward the first, orthodox model. As for the gradualist model, Georgia missed the chance of a gradual, evolutionary transition to a market economy. Consequently, the macroeconomic stabilization model and shock therapy were imposed from outside and provided the basis for Georgian economic policy.
The Stages of Economic Conversion
Judging by the results achieved in systemic transformations, current transformation processes in Georgia (raised to the rank of economic conversion) make it possible to divide the new-type transition period into stages. This period (1991-2008) has its specific features and peculiarities and can be divided into three stages: Stage I (1991-1995), Stage II (1996-2003) and Stage III (from 2004 to date). In order to identify the main trends of the transition period and make an objective assessment of the country’s socioeconomic development, each stage should be analyzed separately.
Stage I, as the initial period of economic reforms, had the following features: in the first place, it was associated with the grave consequences of the command system. In particular, Georgia (like some other post-Soviet republics), in contrast to the East European countries and Russia, after gaining political independence was obliged to address two extremely difficult tasks: while implementing shock therapy, it had to create its own public institutions. The lack of public institutions, of a national monetary system and a national currency (Georgia still remained in the ruble zone, and the Russian ruble of the already disintegrated Soviet Union circulated in the country) prevented the application of shock therapy. This is confirmed, among other things, by the fact that the classical shock therapy
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scheme—the Balcerowicz Plan—was implemented in Georgia by slavish imitation, as a reflection of this plan in the Russian “mirror.”7 In this situation, a deficient version of shock therapy, implemented based on liberalization mainly confined to prices, was doomed to failure.8
In the opinion of the well-known American economist and sociologist J.K. Galbraith, reforms begin not with a new government or laws, but with our views on the economic system.9 In all fairness, one must say that the difficulties of the transition period in Georgia were associated not only with the grave consequences of the command system or mental stereotypes ingrained in the public consciousness, but also with an acute shortage of knowledge. Along with goods shortages, there was a clear shortage of people inspired by reformist ideas. Society encountered many problems that were alien to it but were well known in Western countries. The creation of an orderly economic system out of economic chaos required specialized knowledge and professionalism.
Another reason for the unfortunate start of economic reforms was a rise in social and ethnic tensions. Various kinds of separatism, internal civil and territorial conflicts with autonomies caused irreparable damage to the national economy. No other country started its transition to a market economy in conditions of such devastations as in Georgia. The material damage from the war in the territory of Abkhazia alone exceeds 9 billion lari (GEL), while the damage caused in the Tskhinvali Region is GEL 78 million. The total damage from destruction and fires in Georgia is close to GEL 3 billion, while the damage from military action in Tbilisi is GEL 33 million.10
It should also be noted that the state preserved certain sunset industries and obsolete production facilities that did not meet current requirements, thereby, one might say, conserving the economy. The problem of overcoming excessive monopolization and shortages was also high on the agenda. But the political will for this was lacking, and there was no integrated strategic program taking into account the country’s specific features, which further complicated the development of market relations. Price liberalization in the conditions of an acute shortage of goods operated as an extreme form of administrative command in the economy. It put a heavy burden on society. Here is how U.S. Professor A. Ivanov assessed this phenomenon: paving the way to a market economy in the conditions of a shortage of goods is suicidal. It is the same as performing heart surgery without anesthesia: the patient will die of pain shock on the operating table.11
True, the price reform in Georgia was launched on 1 February, 1992, but free-market prices for some goods were first introduced in the spring of 1991. Whereas in 1991 the consumer price index was 180%, in 1992 it increased 25-fold, in 1993, 92-fold, and in 1994, 120-fold. Regulated consumer prices soared as well: in 1992, they increased 68-fold compared to 1991, whereas household money income increased only 3.4-fold.12
It is interesting to note that price rises were not accompanied by appropriate market behavior such as an increase in production and, consequently, an increase in supply; on the contrary, this process had the opposite effect. The destructive impact of market instruments without a market caused a slump in production. In effect, production was stifled. Whereas in 1989 output fell by 4.8%, in 1990 it dropped by 12%, followed by 20.6% in 1991, 44.8% in 1992, 25.4% in 1993, and 11.3% in 1994.13 In these conditions, the implementation of a liberal monetary policy (which did not fit into the classical scheme) led to the disintegration of the whole economy. At the same time, there was a worsening of the crime situation with subsequent plunder of the economy.
7 V. Papava, op. cit., p. 125.
8 Ibid., pp. 125-128.
9 See: J.K. Galbraith, Ekonomicheskiye teorii i tseli obshchestva (Economics and the Public Purpose), Transl. from the English, Progress Publishers, Moscow, 1979, p. 270.
10 See: Indicative Plan for Socioeconomic Development in Georgia for 1996-2000, Tbilisi, 1996 (in Georgian).
11 See: Argumenty i fakty, No. 23, 1991.
12 See: Indicative Plan for Socioeconomic Development in Georgia for 1996-2000.
13 R. Asatiani, A Small Country Has No Right to Make Big Mistakes, Siakhle Publishers, Tbilisi, 2005 (in Georgian).
In the spring of 1993, the authorities introduced a money substitute: the coupon. This was done without any preparation and was a forced move because the country was left without a currency unit due to an undersupply of ruble notes from Russia. This weak, inconvertible and blocked medium of exchange did not fit into the economy from the very beginning. The depth of the crisis of underproduction in Georgia at that time was self-evident: a drop in output, a sharp worsening of the goods shortages resulting in excess money supply, rapid price rises and high inflation, weak government regulation, uncontrolled monetary circulation, rapidly increasing budget deficit, widespread clandestine usury, rapid growth of unemployment, freewheeling mafia clans, an extremely weak material and technical base, an acute shortage of skilled personnel, emigration of frustrated entrepreneurs, tensions between the center and the regions, degradation of accounting and control, lack of accounting discipline, and emergence of quasi-market structures and relations. All of this culminated and was reflected in the coupon, which depreciated rapidly in this situation. Its unlimited issue led to hyperinflation. From the second half of 1993, inflation ran at 60-70% per month, and the consumer price index reached 7,587.9%. This was the peak of consumer price rises. By the end of 1993, galloping inflation processes developed into hyperinflation. In 1993-1994, the country had no approved budget. In the autumn of 1994, the official exchange rate was 2.5 million coupons per dollar, while the actual exchange rate was around 5.4 million coupons. That year inflation stood at 7,380%. The population found itself in unbearable conditions, with average monthly wages of $1.5 and pensions equivalent to 10 cents.14 This was coupled with an increase in the state budget deficit, a reduction in gold reserves, growing domestic demand for imports, a worsening structure of thg external balance, etc. At the same time, the harmful practice of using National Bank loans to cover the budget deficit became habitual.
In addition, the Georgian economy was paralyzed by the destructive impact of the war in the Tskhinvali Region and Abkhazia. A huge army of refugees appeared in the country and put a heavy burden on the economy. The black market swelled, in effect assuming the responsibility for the biological survival of the population.
In early 1994, the authorities adopted an anti-crisis program of macroeconomic stabilization and systemic transformation. Cooperation with the International Monetary Fund and the World Bank was resumed at a qualitatively new level. Their financial support in adopting and implementing stabilization programs was immense. In the second half of 1994, the intense crisis processes at work in the country began to slow down, although in 1995 the decline in production was reduced by only 5%. That year Georgia already had a budget approved by parliament.
In late 1994, the National Bank began implementing a tight monetary policy, which made it possible to check hyperinflation and created objective conditions for a currency reform. Annual inflation in that period was just over 50%. In the autumn of 1995, Georgia introduced a national currency, the lari, which was declared the only legal tender. Its exchange rate against the dollar was 1.3 lari per dollar. The decline in production and the five-year economic recession gave way to growth. In 1995, growth was recorded at 0.4%.15
From the end of 1995, significant changes occurred in Georgian economic policy, with a switch from the shock-therapy way of transition to a liberal monetarist model. This ushered in Stage II of economic reforms. Since then, this orthodox line of macroeconomic stabilization has provided the basis for the country’s economic policy. The socioeconomic phenomena and processes that subsequently developed in the Georgian economy fit amazingly well into this model. In particular, as a result of a tight fiscal policy the state budget deficit began to shrink, as expressed in growing taxes, reduced tax breaks, cuts in government social spending, government transfers, subsidies, etc. This tight fiscal policy was followed by a tightening of monetary policy, known as dear (tight) money. As
14 See: Materials of the National Bank of Georgia.
15 Ibidem.
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a policy directed against the inflationary spiral, it implies stringent restrictions on the money supply, which include, apart from reduced issue of currency, a rise in bank reserve requirements. The latter automatically reduces commercial bank reserves and, consequently, the money multiplier. The main purpose of dear money policy is to suppress inflation by cutting the money supply and to stabilize the lari exchange rate. As a result of organizational and economic measures implemented in Georgia, inflation processes were brought under control. A step forward in pulling Georgia out of the economic crisis was the adoption of an Indicative Plan for Social and Economic Development in Georgia for 1996-2000. A number of institutional transformations were put into effect.
In 1996-1997, steadily high rates of economic growth and moderate inflation were recorded in Georgia. GDP grew on average by 11%, but due to a number of internal and external factors the GDP growth rate in 1998 was 2.9% lower than in 1997.16
The budget crisis in Georgia in effect started in the first half of 1998. Dear money policy created such significant problems as low investment and business activity, a payment crisis, a shrinking tax base, declining national economic security, etc. All of this was expressed in a sharp drop in state budget revenue.
Attention should also be paid to the fact that when the government, after curbing hyperinflation, continued its anti-inflation policy, it placed emphasis on external debt for covering the budget deficit. Georgia’s growing external debt (its share was over 60%) made the national economy dependent on world organizations and on conditions in global financial markets, which served to create an irrational public expenditure structure. Moreover, external debts were supplemented with domestic debt, so that the 2003 state budget was mainly based on debt repayment. This included external debt service and payment of current and old wage and pension arrears. At that time, there were 900 thousand pensioners in Georgia. Payment of 14 lari pensions required GEL 151,200 thousand a year. If we add to this GEL 55 million of assistance to refugees, annual payments under this item required more than GEL 200 million.17 Taking into account public sector wages and external debt service, one can easily imagine the difficult situation in which Georgia found itself after 12 years of reforms.
The efforts to curb inflation should have created conditions for growth of investment in the economy, but they only caused a short-term slowdown in inflation, merely “quenching the fire” instead of promoting economic development. That is why it gradually became impossible to keep inflation in check over the long term.
It is common knowledge that real stability of the national currency and prices depends on national production and not on the government’s monetary manipulations. Comment here, so to speak, is superfluous: after 12 years of reforms aimed at economic conversion, we produced only one-third of the 1990 figure. Whereas in 1990 Georgia’s national wealth stood at $655 billion, by 2000 it shrank to $388 billion, having lost 59.2%.18
Banks were in effect isolated from investment activity, because high interest rates and low aggregate demand limited private enterprise. Corruption became standard practice, and local production was further undermined by widespread smuggling. The government came to a dead end and could not protect local producers; moreover, it was even unable to create proper laws suitable for the country. Instead of investment in national production, capital fled abroad, because local production was unprofitable and unreliable. Business risk was high, and cashless payments were paralyzed. Instead of that, the hidden economy reached an unprecedented scale (over 60%), and in some areas, as in health care, its share was around 75-85%.19 Georgian economic policy could not keep pace with these de-
16 See: Statistical Yearbook. State Statistics Department of Georgia, Tbilisi, 2003 (in Georgian).
17 See: Materials of the Ministry of Finance of Georgia, Tbilisi, 1996.
18 See: I. Archvadze, What Color Is a Billion?, Mercury, Tbilisi, 2002, p. 21 (in Georgian).
19 See: Statistical Yearbook, p. 57.
velopments. The country was unable to make proper use of the soft loans and grants that streamed into the country. These and other negative factors prevented the transition to a market economy and progress. Democratic society is based on the rule of law, which has clearly been “in short supply” in Georgia since independence to this very day.
It is known that business does not seek to protect such universal values as freedom, rule or law, etc. New institutions are created for their protection, and this is undoubtedly one of the benefits of globalization. Such institutions were created in Georgia as well. As for assistance, a number of global organizations did a great deal in this area, but things did not move forward for lack of political will in the country. That is why the step forward taken by Georgia in the early 1990s was followed by two steps back, with the result that the Soviet monopoly built on the slogan of social justice was replaced with a capitalist monopoly built on clan interests. For this reason, the responsibility of the government authorities fell disastrously, and public interests were subordinated to the interests of a few individuals. We did not take the path that would have led us to the set goal. Although in all fairness it should be noted that in that period there were positive changes as well, with an improvement in some macroeconomic indicators. For example, GDP in 2003 reached 46.8% of the 1990 level instead of 26.3% in 1995 ($866 per capita instead of $614, respectively), etc.20 But this was, so to speak, a drop in the ocean and did not have a significant impact on the country’s economic development.
Hence it is no wonder that a new model of revolution appeared in Georgia, drawing the attention of world public opinion.
In 2004, Georgia entered Stage III of radical reforms, which continues to date. The “Rose Revolution” was assessed as an expression of efforts to protect the people’s constitutional rights and was a kind of response to globalization.
Significant assistance in implementing reforms has been provided under the EU technical assistance program, a USAID project called Business Climate Reform in Georgia, the U.N. Development Program, etc. Special attention has been paid to institutional transformations in all areas of social and economic life, the creation of an administrative and civil service, steps to upgrade and simplify the tax code, improvement of the structure of the judicial system, measures to eliminate the hidden economy and scale down corruption, etc. Improvements in tax administration and cuts in public spending have helped to overcome the permanent state budget deficit that existed until 2003 and have provided an opportunity to balance the budget. From this perspective, certain steps forward have been taken in the past five years: company registration procedures have been simplified; under the new customs code adopted in 2007, the number of tariffs has been reduced from 16 to 3, with changes in tariff rates (which used to range from 1% to 25%). Today they are as follows: 12% for agricultural products, 5% for building materials, and 0% for other goods. The simplification of the customs code has boosted exports. Special attention is paid to attracting foreign investments and bank loans. According to official data, in 2004-2007 the inflow of private foreign capital increased 4.6-fold to $2.3 billion.21
Despite positive changes, Georgia still faces difficult socioeconomic and political problems. First of all, it has proved impossible to balance out social relations and achieve social solidarity in order to avoid armed conflicts, maintain and develop the public sector, etc. Quasi-democracy hinders economic development and the transition to a market economy. In conditions of extremely low demand, social polarization tends to increase. According to the World Bank, Georgia ranks 24th on the list of countries with the highest poverty rate. Today’s pension (despite the trend toward its increase) covers less than a third of the cost of living. A significant part of the population is isolated from business activity, to say nothing of privatization processes
20 Ibidem.
21 See: Economic Trends in Georgia. Quarterly Review, GEPLAC, October 2008, p. 7 (in Georgian).
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rapidly developing in the country without regard for national specifics or social requirements. The protection of private property is inadequate, which poses a serious threat to the development of market relations in Georgia.22
The official statistical service is under government pressure. Unhealthy statistics artificially change the real picture and make it hard to draw correct conclusions. The education system is in a particularly difficult situation in view of mismanaged reforms in this area. In terms of the human development index (first reflected in the U.N. Development Program, with the addition in 1991 of average years of schooling as the basis for a knowledge index), which ranges from 0 to 100 points, 177 countries are divided into three groups. Countries with 80 or more points fall into the high human development category, and those with under 50 points, into the low human development category. Georgia was in the medium category with 72.9 points, but in the 12 ill-fated years it acquired the status of a developing country. True, in terms of the said indicator Georgia has remained in the medium category, but its position has worsened. In the rankings for 2005, it was only in 96th place compared to 81st place in 2002.23
Although average annual growth of real GDP in Georgia in 2003-2007 was around 9% and in 2005-2007 over 10%,24 the 1990 level has not been achieved to date. According to the International Monetary Fund, the business climate has improved, but contracts are still being broken, the judicial system is weak, and the country has been unable to get rid of deep-rooted corruption.
Georgia has failed to become an export-oriented country. Since independence until today it has been unable to avoid a negative fiscal balance. Georgia faces the threat of total unemployment. Economic activity is declining, and employment is naturally declining as well. Experts say that at least 25% of the population could lose their jobs.
The main causes of unemployment in Georgia are not of recent origin but are endogenous. A new wave of job losses began after the war of August 2008. The main reason for this was the unsuitable business environment and, against that background, company refusal to invest in Georgia. The global financial crisis has further worsened the situation. Georgian migrant workers are returning home, and remittances from Georgian citizens living abroad are decreasing. In addition, there are more than 20 thousand refugees from territories occupied by Russia in the August 2008 war (9 villages in the Didi Liakhvi Gorge, 5 villages in the Patara Liakhvi Gorge and 2 villages in the Frone River Valley, and also the Akhalgori District and the Kodori Valley).
Thus, the almost 18-year economic reform in Georgia has created more problems than it has solved. The country has once again come to an economic dead end. The construction of a new economic system should have provided the basis for a system built on the principles of rising living standards and social justice. Unfortunately, this has not happened. Instead of a socially oriented market economy, the order of the day in Georgia is sheer biological survival and national salvation. Poor governance and current economic policy have led to the destruction of the economy.
Despite the difficult political and socioeconomic situation, Georgia has the potential to resolve its challenging problems. First of all, it is necessary to take advantage of available opportunities and make proper use in the country’s interests of the $4.5 billion grant and loan that Georgia is to receive (through 2010). Support for export-oriented lines of production should become a top priority, while imports of technology and development of leasing should take precedence over imports of consumer durables.25
22 See: V. Papava, “The Essence of Economic Reforms in Post-Revolutionary Georgia: What about the European Choice?,” Georgian International Journal of Science and Technology, Vol. 1, Issue 1, 2008, pp. 8-9.
23 See: Statistics of the Human Development Report. 2008.
24 See: Economic Trends in Georgia. Quarterly Review, p. 7.
25 See: M. Kakulia, “Postwar Economic Threats in Georgia and the Ways to Neutralize Them,” in: Economic Trends in Georgia. Quarterly Review, p. 10.
If Georgia is to get on its feet, the first thing to do is to develop an economic policy taking into account the country’s peculiarities. But most important of all, this requires political will both within and outside the country.
C o n c l u s i o n
After the restoration of state independence, Georgia embarked on an extremely complicated transition to market relations. Today, 18 years later, the political and socioeconomic situation in Georgia remains difficult. This is due not only to adverse initial conditions, but also to internal conflicts, wars to preserve the country’s territorial integrity and, most importantly, to inappropriate economic policy. The main purpose of shock therapy was to liberalize the economy instead of developing the country’s production potential, while the orthodox macroeconomic stabilization model was expressed in so-called dear money policy, whose main purpose was to curb inflation by cutting the money supply and to stabilize the lari exchange rate.
Since 2004, despite positive changes mainly expressed in measures to simplify tax administration, Georgia continues to face challenging socioeconomic and political problems. Quasidemocracy impedes economic development in conditions of extremely low demand and social stratification. All of this, in my opinion, clearly shows that the transition period in Georgia is not yet over.
Hadjiaga RUSTAMBEKOV
Ph.D. (Econ.), associate professor, Department of International Economic Relations,
Baku State University (Baku, Azerbaijan).
STATE POLICY IN THE COORDINATES OF POST-SOVIET MARKET TRANSFORMATION
Abstract
Post-Soviet market transformation has focused attention on the applied aspects of concepts dealing with the role of the state in the economy. In many cases, the main theme of discussion is still the primacy of economics or politics. But it is the interests of the individual that
are the primary factor of social development, while economics and politics play an instrumental role in their realization. The author analyzes these problems with due regard for the impact of globalization processes on the economy and state policy.
