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THE CAUCASUS & GLOBALIZATION
Vakhtang BURDULI
D.Sc. (Econ.), department head at the Paata Gugushvili Institute of Economics,
Tbilisi State University (Tbilisi, Georgia).
Ramaz ABESADZE
D.Sc. (Econ.), professor,
director of the Paata Gugushvili Institute of Economics, Tbilisi State University
(Tbilisi, Georgia).
SECTORAL, TECHNOLOGICAL, AND INSTITUTIONAL-ORGANIZATIONAL STRUCTURES OF THE GEORGIAN ECONOMY: DEVELOPMENT ISSUES IN THE CONTEXT OF GLOBALIZATION
Abstract
This article explores the methodological and practical aspects of the development of sectoral, technological, and institutional-organizational structures (govern-
ment and business) in Georgia in the context of globalization. It contains proposals for creating a national sectoral structure that would meet neo-industrial development standards.
KEYWORDS: Georgia's economy, globalization, sectoral structure, neo-industrial development standards.
Volume 7 Issue 1-2 2013 HHECAUCASUSnGLOBAfflZATON 49
Introduction
After the post-Soviet collapse of the economy in the early 1990s, the economic structure in Georgia, as in most other post-Soviet countries, changed drastically due to the loss of many branches of production. Although most of them were based on obsolete technologies, the national economic complex in Soviet times was diversified and to some extent self-sufficient (given the relative equilibrium between the volumes of inbound and outbound products).1
In the past two decades, Georgia has achieved relative economic stability; production is being equipped with information technologies (IT), and construction and transportation are developing rapidly. But the sectoral structure of the country's economy still does not meet current neo-industrial development standards. As a result, Georgia cannot achieve a satisfactory export-import balance, "reanimate" many important industrial sectors on the basis of new technology or utilize idle production capacity in agriculture. The main reason for this "lag" is slowness in tapping the potential of technological progress and integrating into global and regional international economic systems.
This article is devoted to an analysis of current processes in the development of sectoral, technological, and institutional-organizational structures in individual countries in the context of globalization.
Modern Interpretations of Sectoral and Technological Structure of the Economy
The sectoral (industrial) structure of the economy is one of the main parameters that determine the level of a country's development indicators. That is why it is very important to study the state, dynamics and ways of rationalization of this structure and to improve the economic mechanisms for coordinating its transformation.
The operation of each particular economic sector is based on gradually developing technologies (both specific to this sector and used in many sectors) which enhance labor productivity growth. The parameters of material, energy and asset intensity of production change as well. New sectors emerge based on the use of new technologies; they produce qualitatively new products both for production purposes and for mass consumption.
It is known that economic sectors (classified in terms of activities or types of goods and services produced) develop through the diffusion of innovations into these sectors, i.e. based on new technologies. In this process, there is a renewal (modernization) not only of physical, but also of socio-institutional technologies (management or business technologies, i.e. technologies concerned with
1 An analysis of the post-communist economy and the ways of its development in a globalizing world will be found, for example, in: R. Abesadze, "Some Theoretical Aspects of Economic Development," The Caucasus & Globalization, Volume 5, Issue 1-2, 2011; V. Burduli, "The Role of Globalization in Reviving the Economy of Countries in Transition (A Case Study of Georgia)," The Caucasus & Globalization, Volume 1, Issue 3, 2007; R. Abesadze, "High Technologies and Economic Development" (in Georgian), in: Actual Economic Problems under Globalization, Tbilisi, 2011; R. Abesadze, V. Burduli, "Regionalnye aspekty uskorenia tempov ekonomicheskogo razvitia Gruzii," Obshchestvo i ekonomika, No. 7, 2011; V. Burduli, "The Potential of Higher Investment Activity in Georgia," The Caucasus & Globalization, Volume 2, Issue 4, 2008; V. Burduli, "Voprosy strukturnoi perestroiki ekonomiki Gruzii i rosta urovnia zaniatosti," Ekonomisti, No. 5, 2009, and others. A fundamental study of these processes is presented in: V. Papava, Necroeconomics: Political Economy of Post-Communist Capitalism (Lesson from Georgia), iUniverse, Inc., New York, 2005; T. Beridze, E. Ismailov, V. Papava, Tsentralnyi Kavkaz i ekonomika Gruzii, Nurlan, Baku, 2004; V. Papava, T. Beridze, Ocherki politicheskoi ekonomii postkommunisticheskogo kapitalizma (opyt Gruzii), Delo i Servis, Moscow, 2005.
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market or other production relations, and also technologies for government coordination of structural-sector development), which is in large part related to the rapid development of IT and current globalization processes (largely driven by technological progress).
Present and future sectoral structures should be viewed, first and foremost, from a broad, general perspective; in this case, it is appropriate to use the terms "post-industrial" (Daniel Bell) and "super-industrial" or "third wave" (Alvin Toffler) structures, which are mainly applied to developed countries.
To characterize developing countries (including newly industrialized and post-Soviet ones), a more suitable term is "neo-industrial structure," which more accurately reflects the economic development trends observed in the world (including developed countries) and is increasingly used by researchers and journalists.
For example, concepts such as "neo-industrial technological structure", "the structure of neo-industrial economy (economies)," "neo-industrial phase of development," "neo-industrial type of development" "European ... services of neo-industrial economy," "neo-industrial systems ... in national industrial structures," etc., which are increasingly common in the Internet (in the scientific literature, in presentations made by big corporations, etc.), are rarely used in conjunction with the term "post-industrial," which, in our opinion, does not exactly reflect the structural economic changes taking place in the countries of the world (developed and developing). Industry is not contracting but is acquiring new features, "spawning" new sectors and modernizing, although its overall material intensity (per unit of value of produced goods and services) may have somewhat declined.
The formation of a neo-industrial type of national economic structure implies the following:
—the emergence of new sectors, primarily the production of IT equipment and some other sectors that are gaining considerable importance in the structure of the economy;
—sustainable development of innovation activity both in individual economic sectors and in various entities within a particular sector;
—an increase in the share of knowledge-intensive products and services (in the total amount of products and services);
—an increase in the share of the service sector (service industry);
—sustainable development of the key sectors with the use of high technologies, and the production of corresponding goods and services;
—the timely diffusion of new and advanced technologies in a number of traditional sectors;
—a revival, based on advanced technologies, traditional sectors that have temporarily lost their importance (in the case of Georgia, in light industry, high technology industries, furniture industry, etc.);
—an orientation toward the development of the agro-industrial complex in the context of ensuring national food security in the long term;
—the development of technologies for the production of individually customized goods and services (tailoring, housing construction, furniture making, some types of medical services, etc.). Another option discussed in the economic literature is mass customization of vehicles, IT and some other products which may be in demand only among the very rich (this is an opposite trend and implies standardization).
Along with a study of economic structure (from the perspective of economic sectors), it is increasingly important to differentiate sectors (activities) in terms of the technologies they use (new, traditional, key, high, etc.) and in terms of other criteria (export orientation, import substitution and current demand for produced goods). Such evaluative characteristics promote more effective decision
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making in coordinating the development of production (including decisions on its institutional organization) by both government authorities and businesses.
There are various options for differentiating sectors (or individual production units and corporations) in terms of technological levels (technology intensity). Based on this criterion, sectors are classified into low, medium and high-technology categories.2 According to the German Institute for Economic Research (DIW),3 some of them can be described as industries based on high-level and key (cutting-edge) technologies.
Technology intensity in any of the above options is measured by the ratio of R&D expenditures to sales. To determine this intensity, some researchers are guided by fixed R&D to sales ratios. But in many corporations and, consequently, in the respective industries, these indicators change from year to year, which is why many research centers (like the U.S. National Science Foundation) determine their range arbitrarily, without formulating any specific criteria.4
In the theory of long-term technical and economic development5 and "technological orders," both technologies and sectors are structured. A distinction is made between so-called technologies of the key factor and the core of the technological order, and also between backbone and other sectors. In the process of their development, there is a diffusion of the necessary technologies of the dominant technological order. Technologies (technological structure) and sectors (some technologies are simultaneously seen as sectors) make up a kind of aggregate. They are regarded (together with technological and institutional linkages) as a technological order, which keeps developing in any country. The development of existing economic sectors can also take place through the modernization of old technologies specific to these sectors.
An examination of the real and financial sectors of the economy is ever more important.
■ First, this is necessary for the development of proactive measures to prevent undesirable phenomena in the process of interaction between different segments of the real and financial sectors of the economy that could provoke negative effects.
■ Second, theorists should try to understand the institutional contradictions of the global system for the reproduction of fictitious capital.
Due to these contradictions, stock prices to some extent lose their objectivity, thus complicating the process of reasonable capital flow between sectors and countries.6
Our research in this area is based on modern methods of classifying sectors according to the above and other criteria (for example, as industries of the primary, secondary and tertiary sectors). These methods, together with a strategy for the development of the sectoral structure in Georgia based on these methods, are examined in the works of G. Tsereteli.7
Sector/industry classification systems can also be based on other criteria. For example, 20 or 30 years ago industries in South Korea and some other countries were already classified by the criterion of "priority."
2 See: S. Liubimtseva, "Innovatsionnaia transformatsia economicheskoi sistemy," Ekonomist, No. 9, 2008, p. 31.
3 See: Ye. Semionova, "Vozmozhnosti innovatsionnogo tipa razvitia," Ekonomist, No. 6, 2006, p. 14.
4 Ibid., p. 15.
5 See: S. Glazyev, "Mirovoi ekonomicheski krizis kak protsess smeny tekhnologicheskikh ukladov," Voprosy ekonomiki, No. 3, 2009; idem, "Vozmozhnosti i ogranichenia tekhniko-ekonomicheskogo razvitia Rossii v usloviiakh strukturnykh izmenenii v mirovoi ekonomike," available at [www.spkurdyumov.narod.ru/glaziev/htm].
6 See: V. Burduli, "Voprosy strukturnoi perestroiki ekonomiki Gruzii i rosta urovnia zaniatosti," p. 30; D. Frolov, "Teoria krizisov posle krizisa: tekhnologii versus instituty," Voprosy ekonomiki, No. 7, 2011, p. 31.
7 See: G. Tsereteli, "Strategic Goals for the Development of the Productive Forces and Ways of Achieving Them," in: Problems in the Development of a Market Economy in Georgia, Vol. I, Tbilisi, 2000 (in Georgian); idem, "On Assessing the Effectiveness of Government Regulation in a Post-Communist Country," in: Problems in the Development of a Market Economy in Georgia, Vol. III, Tbilisi, 2003; and others.
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The main priority criteria were as follows:
1. The export potential of the industry concerned.
2. The projected demand for the industry's products in the domestic market.
3. The country' s development prospects in the case of accelerated development of the industry (or attainment by the country of a "high industrial stage").
4. Minimization of the country's trade deficit.
5. Minimization of resource and import dependence, reduction in the resource intensity of industry as a whole (this criterion, like all others, is of importance not only for industrial, but also for all other sectors of the economy).
6. A positive spillover effect (improvement in the efficiency of other industries; today this effect is more often referred to as the industry's "multiplier effect").8
It should be noted that at present some sectors/industries meet several priority criteria at once, to which can be added the following:
—high level of competitiveness of the sector in the world market;
—high knowledge intensity of the sector;
—sufficiently high labor and knowledge intensity of products due to a reduction in material and energy intensity;
—minimum or zero level of environmental pollution, opportunities for comprehensive utilization of industrial waste, etc.
In current statistical reporting, in contrast to previous systems, the sectoral structure of the economy is seen in terms of types of activity (activities). Highly aggregated activities are often called sectors (industrial sector, agricultural sector, construction sector) or spheres of activity (service sphere). In most economic studies, more detailed, narrowly defined economic activities (for example, in industry) are called industries or sectors. In the literal sense, activity may also mean a particular occupation such as manager, marketing specialist, etc.
Depending on the position held, statistical reports include some of these workers in various economic sectors, and others, in industries/sectors reflecting their occupation. For example, marketing specialists can work in an industrial company or in a specialized marketing company. In the first case, they will be reported as belonging to the industrial sector, and in the second, to the aggregate service sector.
To avoid misunderstandings, let us note that in this study the term "economic activity" means a narrowly defined "industry" or "sectof' of the economy, as is customary in the economic literature. Let us also note that production in any sector is based on a set of technologies characteristic of this sector.
But a simple study of statistical facts does not provide sufficient grounds for reasoned decisions in matters of rationalizing the sectoral structure either by government regulatory agencies (for example, in improving the investment climate) or by businesses (for example, in making investments in a particular sector).
They should be studied using modern theoretical approaches and the generalized practical experience of different countries gained in recent years, as well as direct quantitative indicators, normalized indicators and qualitative parameters.9
8 V. Khrutskiy, "Rynochnye sistemy i varianty strukturnoi perestroiki promyshlennosti," Rossiiskii ekonomicheskii zhurnal, No. 3, 1992, pp. 97-98.
9 See, for example: R. Abesadze, "Some Theoretical Aspects of Economic Development"; G. Kolodko, "Velikaia transformatsia. Moglo li byt luchshe? Budet li luchshe?" Mirovaia ekonomika i mezhdunarodnye otnoshenia (MEiMO), No. 4, 2010.
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Development of Technologies and Their Diffusion in Economic Sectors
In the system of national accounts, production efficiency is measured based on economic sectors. At the same time, progress occurs and is observed from the perspective of technologies. Thus, in order to assess the effectiveness of the implementation of certain new or advanced production technologies in various economic sectors, it is important to trace their diffusion. In this process, it is necessary to take into consideration the accepted sectoral classification used in national accounts (while disaggregating branches of industry and agriculture into more detailed levels).
The principles of systematizing sectors and technologies are reflected in the theory of long-term technical and economic development.10 It helps to assess the effectiveness of the diffusion of new and modernized traditional technologies in economic sectors. One should bear in mind that the development of technological orders and the transition from one (dominant) order to another are similar to the processes described by Alvin Toffler, who spoke of successive "waves": from the pre-industrial stage to the industrial stage and then on to the "super-industrial" stage. By "wave" he meant rapid progress in science and technology.
The first wave was the development of agriculture (the agricultural revolution), and the second wave, the industrial revolution. The third, "super-industrial" wave brought with it new technologies (IT and others), and this process is still at work today.11
Similarly, the transition from one "industrial" order to another is based on the emergence of new "key factor technologies" and "core". This transition is also gradual: the key technologies of both previous and currently dominant orders are implemented alongside existing elements. It is noteworthy that such an approach makes it possible to present the technological development process and assess its effectiveness at a sufficiently detailed level (which is important for making effective management decisions in the business community and government institutions) both from the perspective of individual economic sectors and as a whole (with an assessment of the quality of the sectoral structure in individual countries).
The spread of technologies (diffusion) in the sectoral structure of the national economy as a whole and its individual sectors includes the following processes:
—new sectors producing technologies (production and consumption) of the "key factor" oriented toward neo-industrial development (within the framework of the modern technological order) are taking shape;
—in post-Soviet countries, some lost technologies (sectors or industries) are being revived, on the basis of modernization, as a necessary component of the neo-industrial economic structure;
—in varying degrees (depending on the technological nature of the sectors), there is a diffusion of key factor technologies into the other sectors and a corresponding modernization of their production technologies. For example, the share of technologies, especially in agriculture, classified as technologies of the key factor of the fourth technological order (internal combustion engine) is still increasing in some developing countries; in the modern, sixth techno-
10 See: S. Glazyev, "Mirovoi ekonomicheskiy krizis kak protsess smeny tekhnologicheskikh ukladov"; idem, "Vozmozhnosti i ogranichenia tekhniko-ekonomicheskogo razvitia Rossii v usloviyakh strukturnykh izmeneni v mirovoi ekonomike."
11 See: A. Toffler, The Third Wave, Part I, Ch. 1, Bandam Books, U.S., 1980.
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logical order, which ensures neo-industrial development, there is a diffusion of IT, computer-aided manufacturing technologies, etc., into various economic sectors;
—traditional industries are modernized not only by implementing key factor technologies in these sectors, but also by "upgrading" existing technologies without their participation (for example, in agriculture this can be done by modernizing traditional crop rotation schemes, land improvement systems and measures to prevent soil erosion; in traditional sectors of industry, mechanical technologies are upgraded either with or without the inclusion of elements of key factor technologies).
On the whole, new and high technologies whose development is of paramount importance for the formation of the modern technological order and a corresponding sectoral structure of the neo-industrial type can be classified as follows12: cognitive technologies in most IT sectors, computer-aided manufacturing technologies, microelectronics, biotechnologies (microbiology, molecular and cellular biology, biochemistry, embryology, etc.), nanotechnologies, photonics and others, atomic physics, aerospace technologies, clean (renewable) energy sources, possibly electric motors (if scientists are able to create sufficiently compact and high-capacity storage batteries), new and sufficiently clean technologies for industrial waste treatment and recycling, etc.
Of course, most of the key technologies ofprevious technological orders do not lose their importance, just as modernized technologies of the basic sectors (agriculture, food and light industry, etc.) that meet basic human needs and are essential components of the modern neo-industrial economic structure.
In order to improve the assessment of the quality of economic growth and development and to help government and business make the most rational decisions in sectoral investment-structure policy, it is necessary to be guided by a system of indicators that reflect the effectiveness of the sectoral structure (and individual sectors) and the need to stimulate it. The system of indicators also helps to improve the performance of government and business institutions (including organizations) so as to enhance their effectiveness in the process of neo-industrial development.
The integrated indicators currently used in statistical reporting give some idea of the effectiveness of the sectoral structure. But today it is also very important to have indicators that would make it possible to assess the qualitative and quantitative aspects of technology diffusion from the perspective of activities (sectors) and the development of appropriate coordinating institutions. In this context, let us consider the possibility of the practical use of the methods for assessing the development of the sectoral structure employed in some modern and traditional approaches.
For an assessment of the "spillovers" of "labor productivity" growth as a result of the diffusion of new technologies into sectors of material production, and also for an indirect assessment of the effectiveness of globalization processes involving cross-border capital flows through a comparison of labor productivity growth in different countries, one can use the approaches systematized by I. Stre-lets.13 In particular, the author discusses research on measuring the "spillover effects" from the information economy to labor productivity growth in other sectors.14
In this work, I. Strelets presents a table (compiled using data from a number of sources) which shows labor productivity growth in various sectors (industries) based on the standard statistical nomenclature for 1989-1999. Sectors in this table are divided into two groups: "IT-intensive" and "less IT-intensive." The table shows that labor productivity growth in the first group was much higher than
12 See, for example: R. Abesadze, "High Technologies and Economic Development," pp. 3-4; V. Burduli, "Vzaimosviaz razvitia tekhnologicheskikh ukladov i transformatsii ekonomicheskikh system," in: Actual Economic Problems under Globalization, p. 24.
13 See: I. Strelets, "Novaia ekonomika: gipoteza ili realnost,"MEiMO, No. 3, 2008.
14 See: W. Nordhaus, Productivity Growth and the New Economy, National Bureau of Economic Research, Washington,
2001.
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in the second group. Thus, it clearly demonstrates that labor productivity growth spillover does in fact take place.
Improvement and use of this method in a developing country (with simultaneous consideration of the overall effect of the diffusion of all new technologies) can be one of the ways to assess the quality of the neo-industrial transformation taking place in its economy as a result of the diffusion of new technologies.
It should be noted that methods for measuring the increase in labor productivity and return on assets (reduction in asset intensity) and the reduction in material and energy intensity through the implementation of new and advanced technologies have been widely used and continue to be used in large corporations and enterprises in order to formulate an effective development strategy; they are also used for entire sectors.15
In our opinion, it would make sense to resume the development of appropriate sector-specific statistical reporting, especially since with currently available IT equipment this will not require significant expenditure of time or labor and will be very useful in management decision making.
An increase in the range and diversity of assessments of the effectiveness of the sectoral structure and the quality of its regulation (market and government) is necessary to improve a number of mechanisms. These include the following: the mechanism for determining the achieved level of compliance with neo-industrial development principles; the mechanism for making decisions to promote the course for neo-industrial development; the mechanism for strengthening proactive regulation; and the coordination mechanism and its institutional component (let us emphasize once again that this includes both market coordination and the government regulation system).
The Influence of Globalization Factors on the Sectoral and Technological Structures in Individual Countries
The current development of the sectoral and technological structures of the economy in individual countries cannot be considered in isolation from globalization processes, as confirmed by the above analysis. In this subsection, we attempt to systematize the main aspects of the impact made by globalization factors on the formation of the sectoral and technological structures of the economy in individual, primarily developing, countries.
Technological development, which is the main generator of current globalization processes, influences the forms and methods of their organization. And one of the characteristic (if not key) features of the ongoing globalization in many countries is the spread of technological progress and, accordingly, the formation of progressive sectoral structures characteristic of neo-industrial development. That is why special attention should be paid to a scientific investigation of this particular process.
Among the current globalization factors that determine the creation and development of sectoral and technological structures in individual countries (especially developed and developing ones) one should include the following:
1. A significant increase in the possibilities for accelerated diffusion of new production technologies from the leading countries to developed and developing recipient countries (given a favorable economic climate in the latter). In this process, the implementation of new
15 A sectoral analysis based on statistical data was performed by one of the authors. See: V. Burduli, Problemy territorialnogo upravlenia proizvodstvenno-khoziaistvennymi kompleksami, Tbilisi, Metsniereba, 1989, pp. 148-180.
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2.
3.
4.
5.
6.
7.
8.
9.
technologies takes place both through the attraction of real foreign capital (primarily in the form of multinational enterprises) and through the purchase and implementation of modernized traditional technologies (in small and medium-sized countries, the development of domestic production technologies is only possible in some selected areas).
The emergence of new opportunities for accelerated adaptation of the organizational and institutional structures of business and government institutional systems supporting it to the acceptance of new technologies and neo-industrial transformation of the sectoral structure of the economy within the framework of the emerging global and regional economic orders. This fact is clearly demonstrated by a number of developed and developing countries which have established a favorable, enabling institutional and economic environment for business and have created modern organizational and institutional business structures.16
The increasing role of international technological cooperation. National economies, their industries and businesses are integrating into the respective global and regional international networks. This is an extremely important process which ensures the maximum possible sectoral and technological diversification of production, especially in small countries with a transforming economy. For business in these countries, it is very important to take part not so much in global as in regional technological cooperation networks.
Wide regulation of globalization processes by global economic organizations. Liberalization of trade (tariff reduction), which is regulated by the WTO, increases export opportunities for countries, on the one hand, and puts some pressure on national producers, on the other. Both factors have a certain effect on the development of the sectoral and technological structure in individual countries.
IMF and World Bank loans available on certain conditions regarding their use. It should be noted that reasonable agreements on the use of loans have a positive influence on the effective development of sectoral and technological structures in the recipient countries.17
Some advantages gained by countries from participation in regional international organizations. Agreements concluded within their framework (on customs tariffs, on the use of regional development funds, etc.) enable them to rationalize the sectoral and technological structure in individual countries. But even as they participate in regional unions, national governments should control the situation so as to prevent a decline in the development of some sectors.
Trade liberalization in a globalizing world increases competition at the international level. This induces national governments and businesses to take active measures to enhance the competitiveness of national enterprises.
Development of national sectoral structures as modern-technology multinational corporations (MNCs) enter national production systems. But a favorable economic climate for doing business helps to integrate more and more countries into global processes, which intensifies competition for the attraction of MNCs.
Globalization processes (low trade barriers, access to information on available technologies, etc.) facilitating the purchase of new licensed technologies by domestic companies. For their
16 See: J.-P. Blandinieres, "Change of the Fundamental Productive and Social Paradigms and Transformation of the Public Sphere in Europe," available at [http://www.recep.ru/files/documents/04_10_10_Blandinieres_paradigms_En.pdf]; N. Ivanov, "Globalizatsia i obshchestvo: problemy upravlenia,"MEiMO, No. 4, 2008; and others.
17 See: V. Papava, "On the Role of the International Monetary Fund in the Post-Communist Transformation of Georgia,"
Emerging Markets Finance & Trade, Vol. 39, No. 5, 2003; idem, Splendours and Miseries of the IMF in Post-Communist Georgia, Laredo, we-publish.com, 2003; idem, "The 'Rosy' Mistakes of the IMF and World Bank in Georgia," Problems of Economic Transition, Vol. 52, No. 7, 2009.
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implementation and the production of competitive products, the states and their business circles should make an effort to train highly qualified specialists and workers.
10. The rules and regulations of the WTO and international credit organizations, which to some extent reduce the opportunities of national producers due to pressure from competing imports and some impediments to exports caused by limitations on the use of export subsidies. Nevertheless, it is still possible to support and protect national business: subsidies and countervailing duties may be applied in accordance with the appropriate article of the GATT (the predecessor of the WTO), the Agreement on Agriculture and the Agreement on Textiles and Clothing. As temporary measures, countries may impose antidumping and countervailing duties (against individual countries or trading partners), and also tariffs and quotas on imports of fairly traded goods causing injury to a domestic industry (non-discriminatory measures applied to all partners). Countries also use non-tariff methods of regulation which are not provided for by WTO agreements but are not inconsistent with them. Permanent measures (waivers of obligations) are also practiced; waivers are granted in rare cases and must be formally approved by the WTO General Council.18
11. Change in the functions of public administration as individual countries adapt to globalization processes. In successfully developing countries, national systems for supporting neo-industrial development and thus business are modernized and refined.
The use of economic methods based on the principles of neoliberalism in regulatory practice does not always or immediately lead to sustainable success. For example, the Washington Consensus, described by its main author John Williamson as a combination of the Austrian School, monetarism, neoclassical economics and public choice theory (critics called this Consensus "neoliberal doctrine"),19 after the first encouraging results achieved in Latin American countries, led to a series of crises (in 1994 in Mexico, and in 1997-2002, a number of crises which started in Asia and ended in Argentina).20 But countries which took a sensible approach to the Washington Consensus (as Joseph Stiglitzput it, "countries that have not closely followed the Washington Consensus prescriptions"11) achieved certain successes—and in some cases significant successes—in neo-industrial development. A weak institutional base for coordinating and ensuring economic growth came to be seen as one of the main reasons for unsustainable development; another reason lay in the excessive constraints imposed on states by the Washington Consensus in matters of timely adjustment of regulatory mechanisms, especially where it was necessary to increase the social orientation of the state and encourage business to invest in sectors of particular importance (obviously, these two problems are interconnected and interdependent). After that, John Williamson and his co-authors gave a new interpretation of issues relating to institution building, particularly regarding the role of the state in creating and supporting market economy institutions, providing public goods, internalizing externalities, and adjusting income distribution.22 The study of issues relating to the adjustment of the principles of coordination of current economic development received even wider coverage in the works of other researchers.23
As we know, in the 1990s government support for sectoral (industrial) policy began to be limited by the prescriptions of global economic organizations. But in 2003, the range of economic poli-
18 See: G.V. Turban, "Razvitie mezhdunarodnoi torgovli i rost protektsionizma," VisnikDonetskogo natsionalnogo universitetu, Series B: Ekonomika i pravo, Issue 2, Vol. 2, 2010, p. 431.
19 O. Ananyin, R. Khaitkulov, D. Shestakov, "Vashingtonski konsensus: peizazh posle bitv," MEiMO, No. 12, 2010, pp. 17, 19.
20 See: Ibid., pp. 19-20.
21 J. Stiglitz, More Instruments and Broader Goals: Moving Toward the Post- Washington Consensus, The World Bank Group Helsinki, Finland, 7 January, 1998.
22 See: Ibid., p. 23.
23 See, for example: "The Barcelona Development Agenda," The Washington Consensus Reconsidered: Towards a New Global Governance, ed. by N. Serra, J.E. Stiglitz. Oxford, 2008; J. Stiglitz, op. cit.
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cy objectives was extended to include the creation of national innovation systems. They were designed to perform some of the functions traditionally associated with industrial policy.24 We also know that government incentives for innovation are supported by global economic organizations and are intensively used in many countries.25
Certainly, industrial policy26 has not lost its importance today (a more precise term for industrial policy is sectoral policy because one of its purposes is to coordinate the development not only of industries, but also of agriculture, construction, etc. It can be divided into separate areas such as food security policy; policy designed to coordinate the development of agricultural sectors providing raw materials for light industry and its various sectors such as textiles, leather and footwear manufacturing; policy of support for export-oriented and import-substitution industries, etc.).
But the role and importance of some tools of sectoral (industrial) policy have changed. For example, direct export subsidies for industrial and agricultural products have been reduced (due to an increase in agricultural output). For its part, this has affected the export of food products as a whole (i.e. processed and unprocessed agricultural products).
Support not associated with innovation activities has significantly shifted toward indirect methods of regulation (tax and financial). But in some developed and developing countries there are various funds for the support of sectoral development. In agriculture, support is regulated by the terms of the WTO's so-called amber, blue and green boxes.27
Generally speaking, under the current guidelines of global economic organizations, individual countries are free to experiment, within designated limits, with economic policies suited to their specific circumstances because "there is no single set of policies that can be guaranteed to ignite sustained growth... International lending organizations and aid agencies should encourage such experimentation.. .The priority is to identify the most binding constraints to growth and to address them through microeconomic and macroeconomic policies."28
Such an approach also underpins modern updated options of neoliberal economic policy being implemented, in principle, by most developed and developing countries. Given economic regulatory mechanisms that ensure such a policy, most developing countries have higher rates of GDP growth than developed countries. Rapid diffusion of technologies from developed to developing countries helps to modernize the latter's technological order, diversify their sectoral structure and increase the competitiveness of their economies on a global scale.
It is obvious, however, that these mechanisms have flaws associated, for example, with the weakness of the proactive29 response (in both developed and developing countries) to crisis situations, with excessive deregulation of the labor market (which reduces the socially oriented opportunities for government and trade union coordination), etc. It should also be noted that in many developing and even in some developed countries government and market systems of institutional mechanisms designed to ensure sustainable neo-industrial growth require serious improvement.
Some of the modern principles of neoliberal policy,30 formulated in a number of scientific works, have already found their reflection in the guidelines and prescriptions of global international
24 See: O. Ananyin, R. Khaitkulov, D. Shestakov, op. cit., p. 23.
25 See: R. Abesadze, V. Burduli, "Innovative Activities and Their Coordination under Advancing Globalization," The Caucasus & Globalization, Vol. 3, Issue 4, 2009.
26 See: V. Burduli, "Industrial Policy: Institutional Framework and Implementation Mechanism", Proceedings of the Georgian Academy of Sciences, Economic Series, Nos. 1-2, 1996 (in Georgian); D. Kuzin, "Promyshlennaia politika razvitykh stran: tseli, instrumenty, otsenki," Voprosy ekonomiki, No. 9, 1993; V. Khrutskiy, op. cit.
27 See: R. Abesadze, V. Burduli, L. Datunashvili, "Problems of Regulation of National Food Security", Proceedings of Scientific Works of Paata Gugushvili Institute of Economics of TSU, Tbilisi, 2011 (in Georgian).
28 O. Ananyin, R. Khaitkulov, D. Shestakov, op. cit., p. 26. "The Barcelona Development Agenda," p. 60.
29 See: D. Kuzin, op. cit., p. 134.
30 See, for example: "The Barcelona Development Agenda"; J. Stiglitz, op. cit.
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organizations. They enable states to respond to the given short and long-term circumstances and somewhat modernize their economic policy, particularly to improve support for neo-industrial sectoral development.
Development of Organizational and Institutional Structures in a Globalizing World
The economic forms of the ongoing globalization are the result of the development of technological orders (the interrelated development of technological, sectoral, institutional and organizational structures). They are associated with the specific features of the spread and distribution of new and traditional technologies in economic sectors of various countries; international diffusion of innovations; rapid development of trade, industrial, scientific and technical cooperation; deepening management relations (in government and business); the emergence of institutions (global and regional international) for regulation and coordination; the peculiarities of cross-border capital flows and labor productivity growth in individual countries (on an international, regional and global scale); the growing importance of MNC activities; a rethinking of the purpose of medium, small and individual enterprises; the growing role of network methods of organization and management; and the development of vertically and horizontally (regionally) organized clusters.
The term "globalization" appeared after the 1970s. But current economic globalization has deeper roots that can be traced back to much earlier times. In the process of globalization, the development of technologies is accompanied by changes in the forms of capital flow within and between countries, significant transformations in the system of commodity exchange (for example, export and import volumes in world trade have steadily increased, reaching 60% of world GDP31), improvements in the forms of property management, and an increase in the role of resource-saving and knowledgeintensive technologies.
The innovation component of technological orders has long gone beyond the borders of individual countries; the world's steadily increasing population requires constant growth in the traditional sectors of material production coupled with their modernization. Accelerating technological development leads, on the one hand, to redundancies in the traditional sectors, and on the other, to the emergence of new activities; this has an increasing influence on the development and change of the employment structure and sets the direction for additional efforts to resolve problems associated with the sectoral, technological and regional restructuring of the economy and reduction of unemploy -ment.
At the same time, the coordination of sectoral development is now connected with the process of regionalization (both at the international level and at the level of individual countries and their regions). For example, the process of sub-national regionalization (an increase in the role of sub-national regions in coordinating economic development) is determined by the objective development of modern technological orders in a globalizing world; its earliest manifestations were observed quite a long time ago, in the 1970s.32
31 See: Iu. Shishkov, "Gosudarstvo v epokhu globalizatsii,"MEiMO, No. 1, 2010, p. 8.
32 See: R. Abesadze, V. Burduli, "Regionalnye aspekty uskorenia tempov ekonomicheskogo razvitia Gruzii"; D.L. Lo-patnikov, Ekonomicheskaia geografía i regionalistika, Gardariki, Moscow, 2006; Regionalnaia politika stran ES, Moscow, IMEMO RAS, 2009; P. Didier, "Le Nord - Pas-de-Calais face aux nouvelles dynamiques économiques: practiques et ejeux de l'aménagement régional," Hommes et terres Nord, No. 4, 1989; P. Martin, H. Nonn, "Stratégies des acteurs publics en Alsace en matière de dévelopment économique et d'aménagement: 1982-1989," Hommes et terres nord, No. 4, 1989.
Globalization processes are inseparably connected with an increase in the number of credit and regulatory institutions (global and international) and the gradual evolution of their activities. In addition, there are changes in the functions of state and regional coordination agencies and their adaptation to the new conditions.
A spontaneous reaction of local social communities to objective processes caused by the development of technological orders and globalization is the trend toward institutional and organizational restructuring observed "at all levels of social life: from firms and communities to integration blocs of states. One of the paradoxes of globalization is that it goes hand in hand with localization processes. The economic and political role of local communities is increasing, and they are drawn into a complex system of relations and dependencies. This provides them with new opportunities and, at the same time, creates new threats, compelling them to look for their own ways of adapting to the new conditions."33
For successful development in the new conditions, local communities should look for adequate ways to coordinate their functioning and integrate into international and national cooperation systems, which will ensure the competitiveness of their firms both within the country (in a globalizing world, the domestic market is open to competing goods) and in the international market.
It should be noted that at the local level (national and sub-national regional), the response to the challenges of globalization and adjustment to them are often delayed. This is characteristic, in varying degrees, of all post-Soviet countries undergoing transformation, since the technological structure of their economies does not meet the principles of neo-industrial development (due to the backwardness of many sectors of the economy).
In particular, the share of high value added production systems (i.e. with a high degree of processing from raw materials to finished products) is small, and there are delays in the spread of modern forms of industrial cooperation (including in the field of innovation) and in the development of modern export-oriented and import-substitution enterprises.
That is why it is necessary to make a theoretical study of the challenges posed by globalization and to develop the prerequisites for the creation of a modern economy at the national and sub-national regional levels through sustainable neo-industrial development and improvement of the mechanism of its regulation.
According to rating agencies, the institutional prudential mechanism in Georgia is much more business-friendly than in many other countries. Nevertheless, it needs to be further improved so as to accelerate sustainable neo-industrial development. This applies, in the first place, to the development of production systems ensuring a high degree of processing (in industry, for example, it is necessary not only to set up assembly plants, but also to create production complexes ensuring the maximum possible degree of processing from raw to finished products).
As the world globalizes, increased competition, expanding markets of goods and services, the need to reduce production costs by using cheaper labor, etc., enhance the role of cross-border capital flows (primarily in the form of technologies). This accelerates technology transfer to developing countries, and not only the transfer of traditional technologies, but also IT, computer-aided manufacturing systems, flexible and other high technologies. This particularly applies to countries with a large consumer market or having preferential opportunities for the export of products (for example, due to participation in interstate regional associations). Countries with a friendly regulatory environment for the adoption of modern technologies have an opportunity to reach the highest level of development.
The transformation of systems of redistribution (of capital, technologies, diffusion of innovations and labor productivity growth, as well as income and budget expenditures within countries) is primarily determined by the conditions in emerging international and domestic markets. Changes
N. Ivanov, op. cit., p. 4.
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occur through the development of technologies, demand conditions and market coordination. Systems of global, regional international, national and sub-national coordination and regulation are also transformed under the impact of the current exogenous and endogenous realities, but for a number of reasons (special interests, the need to reconcile the interests of different countries and different population groups within them, etc.) the necessary decisions are often made with delay.
The development of network forms of production organization and management in the context of globalization has resulted in a profound reorganization of the mode of production.34 It has found its expression in a change in the structure and scale of MNC production, in the forms of interaction between large corporations, medium and small firms forming their own networks, and also within the framework of certain activities at the national and international levels (especially in the area of IT and some other new technologies).
Such methods ensure close cooperation between economic actors within the framework of common information, scientific and technological, financial and marketing networks, thus reducing production costs. This kind of cooperation does not exclude rivalry within networks and increases competition among them in the world market.35
For developing and post-Soviet countries, whose economy is at a stage of transformation, sectoral and technological diversification of production (at the level of the country as a whole and its regions) is an increasingly relevant problem. Due to globalization, new and modernized traditional technologies (especially IT and flexible technologies), computer-aided manufacturing systems, outsourcing and franchising are rapidly spreading across the world. With the development of network structures and corresponding forms of production cooperation, they help to increase the role of small and medium enterprises, and at the local level (small and medium-sized countries and their regions), the role of divisions of high-tech multinationals.
These local structures also provide a framework for the development of production cooperation of local enterprises with both MNCs as a whole and their enterprises located at local levels. International trade liberalization and the capabilities of MNCs facilitate the export of their products. Diversification of production based on these mechanisms ensures a high degree of processing; it is an important factor of globalization implying effective neo-industrial development (particularly in small countries and their regions) and opportunities for the adoption and use of modern technologies.
To address the problems of diversifying production, local communities (small and medium-sized countries and their regions) create a favorable investment climate in their territory. This includes, in particular: convenient tax systems for investment and production; the necessary financial systems (created with the participation of business); training of specialists and workers based on advanced training methods; and modern transportation and product distribution systems. A major role is also played by other elements of the production infrastructure, including public utilities, and by the development of national and regional growth centers.36
As for special economic zones (industrial and industrial-innovation), they are an extreme form which makes it possible to diversify production at the level of local communities.
Thus, to resolve the problems of achieving sustainable and accelerated neo-industrial development in the context of globalization (such as the creation of modern sectoral and technological structures, accelerated development of industry, agriculture, innovation and agribusiness, development of centers of attraction, improvement of business structures in various economic sectors, diversification
34 See: J.-P. Blandinieres, op. cit., p. 3.
35 See: N. Ivanov, op. cit., p. 5.
36 See: V. Burduli, "Ways of Development of Regional Centers of Social and Economic Attraction in Georgia," Sakartvelos Ekonomika, No. 1, 2006 (in Georgian); V. Burduli, N. Arevadze, "Regional Factors of Employment Growth and Their Influence on Economic Development (Georgian Case Study)," The Caucasus & Globalization, Vol. 4, Issue 1-2, 2010, p. 91.
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of the economy in the country and its regions, development of regional auxiliary production systems) it is necessary to continue improving organizational and institutional systems in the country as a whole and its regions.
In the first place, this implies the development of an appropriate strategy setting out the following:
—the ways to improve the system of division of powers between the central, regional and local authorities;
—the ways to improve the institutional structure at all levels of government;
—the tasks of creating a modern technological order, which include the selection of priority sectors (for the country as a whole and with due regard for regional peculiarities), the development and implementation of a policy to stimulate growth centers (main industrial hubs, innovation centers, etc.) and the selection of ways to develop export-oriented, import-substitution and other relevant industries (through the creation of auxiliary production facilities required for their operation);
—the ways to diversify production in the country and its regions;
—the ways to develop small and medium-sized growth centers (along with big cities);
—the methods of promoting the development of auxiliary services and firms (and farms in rural areas) characteristic of the market economy and required for real sector production;
—the ways to establish an effective balance between large, medium and small enterprises, and also between foreign enterprises operating in the country and the development of national business.
In order to pursue a neo-industrial development strategy and ensure the implementation of sectoral policy, the appropriate coordination and regulation mechanisms should be further improved. This is particularly important for countries that have taken the path of post-communist transformation; they should take proper care to coordinate the development of market institutions (at both the national and local levels), organizations (financial and industrial) and state regulatory instruments.
It should be taken into account that neo-industrial development implies the development not only of new and traditional high-tech industries, but also of those which satisfy people's basic material needs (manufacture of textiles, clothing footwear, furniture and other goods).
Meanwhile, after the post-communist collapse of the economy, production in these sectors sharply declined, dealing a blow to agriculture as well. When there is no market for raw products (wool, leather, silkworm cocoons, etc.), many agricultural enterprises operate at a loss and are obliged to reduce production. That is why the neo-industrial development strategy, while ensuring favorable conditions for the development of high-tech sectors, should also provide incentives for businesses to revive production in these areas on the basis of new technology.
An improvement of the fiscal mechanism designed to ensure neo-industrial development implies an improvement of the system of tax rates (in particular, the introduction of a progressive tax scale). It is also necessary to introduce a system of tax incentives to stimulate accelerated development, and also to create an enabling environment for priority sectors as is practiced in different forms in all developed and many developing countries.
In the budgets of some countries, there are special lines (on a permanent or temporary basis) for the support of priority private sector industries. Their use, underpinned by appropriate legislation (such as Japan's 1983 Law on Temporary Measures for the Structural Improvement of Specified Industries37), takes place either directly (at present, in accordance with WTO rules) or through orga-
See: V. Khrutskiy, op. cit., p. 100.
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nizations set up for this purpose (e.g. development banks). In some countries, there are special organizations for coordination of the food market and promotion of agricultural exports.38
The Georgian fiscal mechanism is also in need of improvement, taking into account that Georgia has no budget and tax system at the regional (territorial) level. At the same time, in a globalizing world the functions of regional coordination in developed countries are expanding, especially in the area of business support and the creation of regional production structures.
Today, competition between developing countries for real foreign capital equipped with modern technologies, primarily for multinational enterprises, has sharply increased. This is because "MNC subsidiaries bring new production technologies, give access to the desired capital resources and, most importantly, provide an opportunity to use well-known brands and distribution networks that make it possible to enter the markets of large countries."39
In view of this and considering that no country, let alone a small one, can on its own create a full-scale industrial (sectoral) complex, it is necessary to provide for fiscal and other institutional preferences for the operation of multinational enterprises and other production facilities equipped with modern technologies (suitable for deployment in the country) concentrated in the real sector of the economy (this does not apply to agriculture because massive attraction of foreigners to this sector will lead to the displacement of domestic producers from rural areas). Such preferences can be granted as the result of separate negotiations with companies intending to locate their enterprises in the country (if their location is advisable), as is customary in international practice ("in the sphere of international direct investment flows, sovereign states are obliged to negotiate with quasi-sovereign entities: MNCs"40).
Naturally, it is also necessary to encourage the purchase and implementation of modern real sector technologies by domestic businesses.
To accelerate the development of the sectoral structure of the economy in a neo-industrial country, financial policy should be more clearly targeted to stimulate (in accordance with WTO rules) the creation of enterprises based on technologies characteristic of modern technological orders. The country's sufficiently developed system of private banks should be more explicitly oriented (by means of banking instruments of government regulation) toward an increase in the amount of long-term loans for the development of priority sectors. This can be achieved through proper use of the central bank's regulatory mechanisms.
It would also make sense to set up development funds (or investment funds) in the country and its regions to provide additional financing in the form of subsidies to priority industrial and agricultural enterprises in accordance with WTO rules and the recommendations of international credit organizations. For targeted concessional financing of private sector enterprises based on share capital contributions from both the state budget and private investors, it might be possible to set up a development (or investment) bank.
Farm subsidies today are subject to special WTO regulations. In some of our works, we suggest rational ways of subsidizing the development of agriculture within the framework of these WTO regulations.41
At the level of the whole country, and also of its regions and local communities, we need further development of the institutional structure of the economy (in public and private enterprises, between them, and between the state and private enterprises).
38 See: V. Dobrosotskiy, "Gosudarstvennoie regulirovanie prodovolstvennogo rynka,"MEiMO, No. 9, 2000.
39 Iu. Shishkov, op. cit.
40 Ibid., p. 9.
41 See: R. Abesadze, V. Burduli, L. Datunashvili, op. cit.; V. Burduli, L. Datunashvili, "National Food Security as an Object of Regulation," in: Priorities of Sustainable Development of Agriculture (Proceedings of International Workshop), TSU Publishers, Tbilisi, 2012 (in Georgian).
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Following the example of developed countries, we should diversify the mechanisms for the economic management of public enterprises. It is also necessary to expand the range of contracts between the state and private enterprises (for works ordered by national, regional and local authorities).
It is also very important to develop institutional relations based on dialog and conclusion of contracts (on government preferences and business obligations) between national and regional authorities, on the one hand, and businesses, on the other.
Of particular relevance today is the question of the development of modern institutional relations in rural areas, which should take place through the creation of sectoral owners' associations, the establishment of public, mixed and private specialized auxiliary plants, organizations, firms and farms, and the granting of subsidies for core production activities.
Conclusion
Technological development and improvement of economic mechanisms in a globalizing world are interconnected and interdependent processes. They influence the formation of sectoral structures in individual countries. These processes also determine the corresponding development of institutional and organizational structures of business (both at the global level and at the level of individual countries). Under the impact of technological progress, global, regional international and national coordination and regulation mechanisms improve and adapt to the new conditions.
Countries that have been able to adapt to globalization processes in due time and are prepared for the sustainable adoption of the achievements of technological progress are successfully transitioning to the modern neo-industrial stage of development.
In order to create an effective sectoral structure characteristic of neo-industrial development, it is important to assimilate the experience of successfully developing countries. This experience consists in the systematization and assessment of the effectiveness of sectoral and technological structures (considering the priority of various sectors and technologies), their institutional and organizational support, and market coordination of the formation of business structures.
The tasks of neo-industrial modernization of countries, including Georgia, which is going through a period of post-communist transformation, imply further improvements in the methods for assessing sectoral and technological systems (with corresponding development of statistical reporting and analysis methods), increased effectiveness of business processes and, of course, more effective coordination of government economic policy (with a critical assessment and assimilation of the said experience).
This will ensure a deeper integration of the country's economy into the system of global and regional international cooperation ties (including through the attraction of multinational enterprises) and trade relations, helping to create a neo-industrial sectoral structure and to achieve high and rational employment and sustainable socio-economic development.
