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THE CAUCASUS & GLOBALIZATION
Ramaz ABESADZE
D.Sc. (Econ.), Professor, Director of the Paata Gugushvili Institute of Economics, Ivane Javakhishvili Tbilisi State University (Tbilisi, Georgia).
SOME THEORETICAL ASPECTS OF ECONOMIC DEVELOPMENT
Abstract
This article examines some theoretical and applied issues of economic development with special emphasis on the relationship between economic develop-
ment and economic growth, the factors and indicators of economic development, and its peculiarities in developed, developing and transition countries, including Georgia.
I n t r o d u c t i o n
Researchers in post-communist countries, including Georgia, have so far paid much more attention to economic growth than to economic development. And this is only natural because until recently the changes associated with economic development occurred very slowly, almost imperceptibly, and their analysis was much more difficult. It is no accident that before the emergence of post-in-
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dustrial society there was a similar situation in the developed countries as well. True, in studying economic growth researchers sometimes also considered qualitative changes in the economy, or economic development.
The term "economic development" is often identified with the name of an educational discipline taught at colleges and universities throughout the world. As a discipline, "economic development" mainly relates to the economy of developing countries. But economic development takes place under any economic system and in countries at any level of development. The only significant difference lies in its goals and objectives.
Another frequently used term is "development economics," which also seems incorrect because it refers not to problems in the development of the economic system but to the economic problems of the development of something (no one knows what exactly).
In the economic literature, the very essence of economic development is under-researched, as well as the interdependence of economic development and economic growth, the factors and indicators of economic development, etc.
The Essence of Economic Development
Since we are used to focusing on quantitative rather than qualitative economic indicators, the concept of "economic development" is often confused with the concept of "economic growth." As noted above, such was the state of affairs throughout the world until the economy of the developed countries entered the phase of post-industrial development.
The difference between these two categories lies in the very meaning of the words that express them. The word "growth" means an increase in some quantity over time, a quantitative increase. Thus, it refers only to quantitative changes in an object or phenomenon. As for "development," this word means the transition of something from one state to another, more perfect state. Consequently, it reflects a mostly qualitative change in an object or phenomenon toward greater perfection. One may conclude that economic growth means a quantitative increase in the size of the economy, while economic development means an improvement in the economy, a transition to new properties.
In the literature, economic growth in its broad sense implies qualitative growth as well. Such an expansive interpretation is dictated by a desire to invest this term with greater meaning. But there is no point in using the concept of economic growth in this broad sense: after all, there is a more suitable term—economic development—for expressing qualitative improvements in the economy.
This does not mean that there is no deep-rooted connection between economic growth and economic development. The very fact that quantitative changes eventually transform into qualitative changes indicates that economic growth is one of the factors of economic development. For example, the emergence of a post-industrial economy would have been impossible unless the world had first reached a certain level of industrialization. For its part, economic development creates unlimited conditions not only for qualitative improvements in the economy, but also for its further growth. However, economic growth can also occur without economic development, as under extensive growth of production factors. A case in point is the functioning of economic systems in pre-industrialization eras. Special mention should be made of the traditional economy: for thousands of years, its size grew almost without economic development. Yet in the final analysis the unprecedented acceleration of economic growth nevertheless occurred as a result of economic development.
For its part, economic development is possible without economic growth and even during an economic recession. Take the process of economic transformation (qualitative improvement of the economy) in most post-industrial countries that took place during an economic recession. Economic development without economic growth can occur in developed countries because population growth rates in
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these countries are low and living standards can rise due only to the use of the latest technologies, a reduction in the material and energy intensity of products, an improvement of their consumer properties, and other qualitative changes. But this relationship will not last for long: in the longer term, economic development will inevitably be followed by economic growth, and vice versa. Consequently, in the long-term perspective economic development and economic growth do not exist without each other.
Economic development is accompanied by changes in the economic system, which itself is based on the set of its components. These are forms of ownership, physical and human capital (and factors of production in general), technology, information and institutions. All of them are present under any organizational structure of the economic system. But under each of these structures their role and importance are different. Under "pure" capitalism, for example, economic relations are determined by physical capital; in a mixed economy, by human capital; and in a traditional economy, by institutions.
In the process of economic development, progressive changes occur precisely in the elements of the economic system, and this is reflected in the quantitative and qualitative characteristics of the economy. The main driving force behind this development is the irresistible desire of people for greater satisfaction of their spiritual and physical needs. The necessity to improve the economic system is also dictated by the fact that economic resources are limited while human needs are unlimited. The scarcity of economic resources necessitates their ever more efficient use, and also their preservation for the benefit of future generations.
If various elements of the economic system change simultaneously, this produces a synergistic effect, which accelerates the economic development process. And if tensions arise between various elements, this calls for a change in the organizational structure of the whole economic system, which may be either revolutionary (abrupt) or evolutionary (gradual). In the first case, there are rapid changes in elements of the economic system, followed by an equally rapid change of the social order (as in the transition from feudalism to capitalism). In the second case, changes occur gradually and the social order changes imperceptibly though significantly (as in the transition from industrial to post-industrial society). In both cases, we get a qualitatively new state of the economy that provides opportunities for faster economic development. New forces come on the scene, accelerating the economic development process still further. As a result, we have to deal with qualitatively new forms of ownership, physical and human capital, technologies, institutions, etc.
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The rate of economic development is influenced by numerous factors, among which the following are of particular importance:
Natural Resource Potential
Natural resource potential is one of the basic, universal factors of economic development. Natural resources are diverse. This concept covers resources such as land, soil, water, forests, biological resources (plants and animals), minerals, and climatic, recreational, planetary and space resources. It can be said that today this factor is not critically important to an individual country because the internationalization of the economy has enabled high technology countries poorly endowed with natural resources (like Japan, South Korea, Singapore, etc.) to use the natural resources of other countries. But all other things being equal, a country rich in natural resources has additional advantages. In Kuwait, for example, living standards are high because of its abundant oil reserves, while economic development in the countries of tropical Africa is significantly retarded because they are very poor in natural resources. If we picture the world economy as the economy of a single country, we will find
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that not only the development of this economy, but also its very existence would be impossible without natural resources.
The special role of natural resources is expressed in the fact that new types of resources (such as nuclear energy, solar energy, bioenergy, etc.) that are often of great importance to economic development are harnessed in the course of economic activity; natural resources, both renewable and non-renewable, are not unlimited, which is why they should be used rationally: renewables so as to allow their replenishment, and non-renewables in the most economical way, so that they would last as long as possible. At the same time, it is necessary to look for alternative sources of non-renewables so that mankind would not be faced with a disaster when they are fully depleted; in the use of natural resources, we should take account of the laws of nature because man cannot change them; for the rational use of natural resources, it is sometimes necessary to create appropriate sectors of the economy, which has a serious effect on its structure and thereby leads to progressive changes in the economy.
Physical Capital
Physical capital is another basic and universal factor of economic development. It refers to assets such as machinery, plant, equipment, buildings, structures, etc., used by people to produce goods and services. Any progressive change in physical capital has a direct effect on economic development because it serves to increase labor productivity, improve product quality, reduce the material and energy intensity of goods and services, improve working conditions, etc.
Quantitative and qualitative changes in physical capital consistently reduce the share of manual labor in the process of production and its direct impact on the nature of output. Hence an increase in the control function performed by man in the process of production as it requires intellectual rather than manual labor. Intellectual labor is primarily based on knowledge and experience gained by people in the course of education and work. That is why it is not only human knowledge and experience in their pure form that play an increasing role in economic outcomes, but also physical capital, which embodies the knowledge and experience accumulated by mankind.
Science, Technology and Technological Knowledge
Technology is a set of rules, procedures and means used to transform input materials into goods or services. More precisely, technology is a combination of qualifications, devices, infrastructure, tools and relevant technical knowledge needed to bring about the desired transformations in materials, information and people.1 The components of technology are machines, instruments and raw materials, but the main thing is the set of rules and procedures according to which these transformations are performed.
Technological knowledge means an ability to select the best technologies for the production of goods and services.
Technological improvements boost productivity, change the role and functions of man in the production process, and increase the country's industrial capacity. Technological progress is achieved through innovation. Some of the major innovations in mankind's history were the industrial revolution, standardization, mechanization and conveyor belts. They laid the groundwork for contin-
1 See: M.H. Mescon, M. Albert, F. Khedouri, Management: Individual and Organizational Effectiveness, HarperCollins College Div; 3 Sub edition, New York, May 1988.
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uous, flexible automated manufacturing based on electronization, computerization and robotization of production. Today the focus is shifting to non-waste technology, which is of great importance for sustainable global economic development.
The basis for inventions and innovations is provided by discoveries, primarily in basic and then in applied sciences. Thus, the development of science is the cornerstone of economic development. One can say that the process of economic development is a process of innovation both in physical capital and in the forms of industrial organization, human capital, technologies, institutions, etc. Progressive changes in technology, human knowledge, skills, traditions, legal and cultural norms, etc., are effected precisely through innovation.
Human Capital
Human capital is the stock of a person's natural abilities and his/her knowledge and skills acquired through education and practical experience and used in the process of production. The new economy requires a very high level of human capital, which should be oriented toward advanced machinery and technology, wide use of computerized information systems, flexible manufacturing, and implementation of innovation systems. The key component of human capital is education. It is very important for economic development because of its positive external effect. An educated person has more opportunities to create new ideas aimed at technological improvements and the development of new management and organizational methods. That is why a brain drain (the emigration of educated people from a country in search of a better life) is highly undesirable for the country. Qualitative and quantitative growth of human capital is the main factor in transforming the economy toward modernization and improving economic and legal institutions.2
Human capital includes the following elements:
(1) physical and spiritual health;
(2) mental and physical abilities;
(3) professional and institutional skills;
(4) professional and life experience;
(5) professional and general knowledge;
(6) motivation, and others.
Physical and spiritual health depends on the level of development of health care in the country, the moral and psychological climate in society, the individual's material status, the amount of spare time, etc.
Mental and physical abilities are determined by the individual's personal qualities. There are no two people with the same mental and physical abilities.
Professional skills are naturally acquired in the process of work, while institutional skills are determined by the country's institutional level, by the sophistication of its formal and informal institutions.
Professional experience is also gained in the performance of work, and life experience is shaped by the individual's entire practice. Life experience plays a fairly important role in how people perform their official duties and in their career development.
Knowledge is gained by learning and consolidated through its practical implementation. Motivation determines how conscientiously people perform their duties. It depends both on personal qualities and on the level of industrial organization and moral and material incentives.
: See: Ekonomika razvitia: modeli stanovlenia rynochnoi ekonomiki, Infra-M, Moscow, 2001.
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Along with other factors, the nature and structure of employment is of great importance for creating and improving human capital.
All elements of human capital are closely interrelated. For example, if a person is physically or spiritually unhealthy, there is no point in talking about the implementation of other elements. But in different economic systems the elements of human capital are of different importance. Under slavery and feudalism, for example, the greatest importance was attached to physical abilities and health, and in the traditional economy, to the customs, laws, religious views and, consequently, skills that existed in a particular society.
Under capitalism, the role of knowledge gradually increases, and in post-industrial society it becomes decisive. Whereas in the pre-capitalist economic system the main economic category was land, and under capitalism it is capital, in the new (post-industrial) economy the main economic category is knowledge. That is why in the developed countries so much importance is attached to human capital.
The creation and improvement of human capital and its effective use calls for an appropriate social and economic situation in the country. This applies both to the educational and health care system and to the level of development of science, employment moral and psychological climate, forms and methods of industrial organization, etc.
Institutions
The foundations of institutionalism were laid in the late 19th and early 20th centuries. Its founder was the American economist Thorstein Veblen, and its most prominent representatives were John Commons, Wesley Mitchell, Max Weber, Werner Sombart, John Kenneth Galbraith, Gunnar Myrdal, Ronald Coase, Armen Alchian, Kenneth Arrow, James Buchanan, Douglass North, Joseph Stiglitz, Oliver Williamson, and others. Institutionalism holds that the economic behavior of people is determined in large part by society's socio-legal system, and also by traditions, customs, habits, etc. Thus, the concept of institutions covers informal institutions (traditions, customs, habits) and formal ones, which include, on the one hand, the system of structures and organizations (markets, market infrastructure, firms, labor unions, government regulatory agencies), and on the other, the system of legal norms (laws, decrees, orders, regulations, etc.). Formal institutions are those presented in the form of written laws, whereas informal institutions are those which are not recorded in legal documents but determine to a significant extent the daily behavior of people, their actions and decisions.
Formal institutions can be transformed into informal ones and vice versa. Those formal institutions which have emerged from informal ones are most consistent with human nature.
Of course, a reflection of all informal institutions in formal ones is impossible (and unnecessary). But the more informal institutions are formalized and legalized, the more natural and consistent with the interests of economic development they will be.
When formal institutions are imperfect, their deficiencies lead to the emergence of new and an increase in the activity of existing informal institutions destructive to the economy, which seriously hinders economic development. Generally speaking, the creation of absolutely perfect formal institutions is impossible, and this is why an informal sector emerges in any country, though naturally on a different scale. When an economic system gives way to another system, institutions (especially formal ones) crumble. The creation of new institutions is a fairly difficult process. Difficulties are often caused by lack of knowledge about the new options or by deliberate mistakes. The faster the progressive change in both formal and informal institutions, the faster will the conditions for economic development be created.
Ecological Factor
The word "ecology" comes from the Greek and means a branch of biology concerned with the relation of living organisms with the environment. In a broader sense, the concept of ecology is used in studying the economic problems of nature management and conservation. The ecological (environmental) factor in economic development reflects the economic impact of the requirements of rational nature management and environmental protection.
When the ecological factor is taken into account, the economy moves into a totally new state with subsequent qualitative changes in almost all its elements, even including forms of ownership. The latter is due to the fact that compliance with the requirements of rational nature management and environmental protection is easier and more comprehensive under appropriate forms of ownership. For example, it is known from theory that "the tragedy of the commons" is associated with the absence of private ownership of economic resources. But as it turns out, public ownership is often preferable for the same reasons.
The ecological factor causes changes in the allocation of resources and facility location, in the economic structure, physical and human capital, product quality, etc. A substantial part of resources is used to implement nature conservation measures, while the location of production facilities is preferable in areas where the requirements of rational use of resources and environmental protection will be met to the fullest possible extent. Entire industries are created to address the problems of nature conservation, which leads to significant structural changes in the economy. Environmental requirements encourage the development of fundamentally new material- and energy-saving non-waste technologies and other eco-friendly technologies. Special equipment and instruments are created to protect the environment, and their maintenance is associated with the emergence of new categories of professional staff (environmental engineers, green energy specialists, environmental economists, environmental experts, etc.). The same tasks cause changes in institutions (laws, economic management agencies, human habits and way of life, traditions, etc.). The ecological factor can either retard or accelerate economic growth: retard because it requires additional expenditure, reducing the profitability of production and, accordingly, total supply; and accelerate because, first, the demand for eco-products is increasing and, second, compliance with environmental requirements leads to the creation of entire new industries. But at the initial stage of nature conservation measures their retarding effect on economic growth is much stronger than their accelerating effect. This gap is gradually narrowing, and when the greening of the whole economy is completed, it will disappear altogether. By that time, nature conservation processes will probably cease to be an "externality" for the market system, because every economic agent will realize that the Earth is our common home and any kind of harmful pollution will cause damage to all.
The requirements of rational nature management and conservation are associated with the scarcity of economic resources, pollution of the environment and the effect of destructive natural forces. From this perspective, the history of world economic development can be divided into three stages.
■ At the first stage, natural resources were believed to be inexhaustible and attention was mainly paid to an increase in production capacity.
■ At the second stage, the requirements of rational nature management and conservation were already taken into account but not yet fully implemented.
■ At the third stage, the economy has entered a phase of sustainable economic development, which continues to this day.
Special attention to this problem began to be paid only in the late 1960s and early 1970s. In 1972, a United Nations Conference on the Human Environment was held in Stockholm. Its participants expressed concerns that maintenance of the existing economic development rate could lead to a global disaster and adopted a program of "zero growth," which provided for a reduction in the rate of
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both economic and population growth. Naturally, this program was not destined to be carried out. In 1987, the U.N. World Commission on Environment and Development issued a report entitled Our Common Future and proposed a strategy for sustainable development. In 1992, the U.N. Conference on Environment and Development in Rio de Janeiro (also known as the Earth Summit) developed and adopted a program called Agenda 21 (an agenda for the 21st century), which formulated the essence and goals of sustainable development. Its message is that society should meet its current needs without jeopardizing the needs and the very existence of future generations.
The requirements of sustainable development can be met only through a rational exchange of substances and energy between society and nature. This can be achieved when human needs are determined by the patterns of self-regeneration and self-reproduction of nature. Consequently, the order of the day is coevolution, or joint development of society and nature. The biosphere of our planet is moving into a new state known as the noosphere, in which people try to offset the negative effects on the biosphere not only from their own activities, but also from the operation of natural forces.
International Factors. Globalization
The basis of international economic relations was laid in the distant past. But the world economy in the modern sense of the word took shape after the emergence of a world market of goods and services, when factors of production began to move across borders, followed by increasing internationalization and transnationalization of the economy and a trend toward the creation of a single market of goods, services, capital, labor, knowledge, etc., in other words, toward a globalization of the economy.
In the economic literature, there are different views on the causes of globalization. Some hold that globalization is an objective result of historical development, while others believe that it was "organized" by the major powers in order to use the national resources of other countries in their own interests and ultimately to abolish nation states altogether and establish a single world government.
In our view, globalization is an objective result of the development of national economies and its main causes are:
(1) the internal needs of economic development, the need to raise real living standards, which is of interest to all countries;
(2) the desire to maximize profit; and
(3) the existence of global problems that cannot be solved by individual countries.
Everyone knows about the benefits from foreign trade gained by the participating countries. It enables each person to consume more diverse goods and services in larger quantities. Producers can use their possibilities not only within the country, but also abroad. Today there are many global problems that can be solved only by a joint effort: elimination of poverty and backwardness; establishment of peace and disarmament; food security; supply of natural resources; environmental and population stability; development of the human potential; exploration of the World Ocean and outer space, etc.
But although all countries benefit from globalization, the quality and amount of these benefits vary from country to country. The developed countries are in the most advantageous position because they have larger quantities of higher-quality factors of production. As a result, globalization allows them to:
(1) use the much cheaper labor and cheap resources of other countries;
(2) attract highly skilled labor from other countries;
(3) export used goods and low-quality products for which there is no demand at home to other countries;
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(4) export obsolete and worn out equipment; and
(5) create favorable conditions at home for accelerating scientific and technological progress by attracting the vast resources required for this purpose from other countries and regions of the world.
Other countries in the process of globalization:
(1) use world experience and the latest achievements of scientific and technological progress;
(2) receive significant financial assistance; and
(3) solve many problems (of poverty, environmental protection and health care).
But globalization also creates serious problems:
(1) as it spreads to almost all areas of the national economies, it limits the scope of government regulation;
(2) negative phenomena arising in one country can spread rapidly to all other countries in the world;
(3) the scale of economic flows in the process of globalization is so large that in some cases they can have a destructive effect on some (especially weak) countries;
(4) the scale of emigration from developing countries, including that of highly qualified specialists, increases;
(5) migration flows caused by globalization create demographic problems in many countries;
(6) globalization often has a different effect on different countries and sectors, significantly distorting the development of some countries and sectors; and
(7) globalization is characterized by financial market instability, and an increased outflow of "hot money" may cause not only fluctuations in capital markets, but also a banking, monetary and general financial crisis.
Some analysts also say that the major states plunder the natural resources of developing countries, worsen the environmental situation and working conditions in these countries, reduce their competitiveness and increase poverty; that national culture degenerates due to globalization, and that countries lose their traditions and their national identity in general. Naturally, such a danger exists in a globalized world, but it should be taken into account that globalization is an objective process that cannot be abolished by any individual country. Globalization means increasing competition, but at the same time it leads to greater cooperation between actors in the global market and between states. That is why instead of rejecting globalization out of hand the states should try to win out in the competition, naturally not by force but by means of knowledge, by developing science, creating high technologies, improving culture, enhancing intellect, etc. It is true that under globalization some functions of the state are restricted, but it acquires a new and important function: to offset the negative impact of globalization, ensure effective use of foreign assistance, increase competitiveness, and maintain and develop the best national traditions. Unless this is done, the country may face economic collapse,
followed by degradation of science, culture, traditions, etc.
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A quantitative assessment of economic development is very difficult because qualitative changes sometimes cannot be expressed in figures. It is particularly difficult during the transition period, when one economic system is replaced by another with an accompanying economic recession. Here we have to deal with two opposite processes: the economic system moves into a new and more perfect
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state while the country's economic and social indicators deteriorate. Another possible situation is when the country's economic indicators improve but the social situation worsens, etc.
First of all, we must determine when exactly economic development occurs: when economic indicators improve; when the social situation improves; when progressive changes take place in the economic system; when two of these conditions are met or only when all three conditions are met simultaneously.
There is no doubt that the economic system as a whole should serve the individual and ensure individual well-being. However, we must also take into account that it is not private interests but the interests of the whole country that should be the main focus of attention. The results of economic development may be confined to changes such as increased defense capability, improved environmental situation, etc., without being reflected in social indicators.
Thus, it is impossible to speak of economic development based on only one category of indicators. Economic, social and qualitative indicators should be considered separately.
Economic Indicators
Among these indicators, gross domestic product (GDP) per capita should be mentioned in the first place. Naturally, an increase in this indicator—even when the population is decreasing—is the result of economic development. But this indicator has its limitations as well. First, its reduction does not always mean a failure of economic development (as with a reduction in material and energy intensity, an improvement in product quality, etc.), and second, its increase does not mean that the condition of all strata of the population has improved; moreover, the condition of the poorer strata may even worsen. Increases or decreases in income inequality are not reflected in this indicator either.
Despite its shortcomings, it would not be right to ignore this indictor. It can well be used together with indicators showing whether the per capita income of the least well off groups has risen or fallen and whether income inequality in the country has increased or decreased. Such indicators primarily include:
(a) absolute per capita income of the poor strata; and
(b) the Gini coefficient, a numerical measure of income inequality ranging from 0 (perfect equality) to 1 (perfect inequality).3
From the perspective of economic development, the best situation is when GDP per capita and the per capita income of poor households increase while the Gini coefficient decreases. But in any other case as well an improvement in these two indicators (simultaneous or independent) points to positive qualitative changes in the economic system.
Other economic indicators that can be used in this context include national income, net national product, volume of exports, investments in innovation, education, research and development, etc.
Social Indicators
The best-known social indicator is the Human Development Index (HDI). It has three dimensions:
■ life expectancy at birth;
■ composite education index;
■ GNI per capita;
■ the HDI is calculated by the United Nations and published annually.
See: M. Todaro, Economic Development, 6th Edition, Longman, London, 1997.
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There are also many other social indicators of economic development:
■ secondary and tertiary enrolment ratio;
■ newspaper circulation per capita;
■ occupational employment rates;
■ electricity consumption per capita;
■ average number of persons per room;
■ daily animal fat consumption per capita;
■ life expectancy;
■ total fertility rate;
■ stability of democratic institutions, etc.
Indicators Reflecting Qualitative Changes
As noted above, in some time periods the economic development process may not be accompanied by an improvement or worsening of social or economic indicators, which is why we need indicators that would reflect qualitative changes in the economic system. These include:
■ changes in forms of ownership;
■ adoption of new technologies;
■ industrial restructuring;
■ privatization of enterprises;
■ reorganization and modernization of production;
■ institutional changes;
■ innovation investment as a percentage of total investment;
■ spending on education as a percentage of GDP;
■ spending on science as a percentage of GDP;
■ education level;
■ progressive structural changes, etc.
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Groups of countries with developed, developing and transition economies differ widely in terms of their economic development peculiarities.
Developed Countries
Developed countries are those with a highly developed market economy and a very high level of socio-economic development.
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In the 1950s, the developed countries entered the stage of post-industrial development. Postindustrial society is characterized by an increasing share of the tertiary sector (the service sector) in the economy, whereas in traditional society the dominant sector was the primary sector (agriculture, forestry, hunting and fishing), and in industrial society, the secondary sector (industry and construction). Whereas in traditional society the basic economic relations were associated with land, and in industrial society with capital, in post-industrial society they are associated with the priority development of knowledge and skilled labor, information and high technology industries. The goal of this society is all-round development of the individual based on social equality, intellectual improvement, rising living standards and improving quality of life. One of its main goals is to provide for future generations through sustainable economic development.
The post-industrial economic system was formed through the development of the industrial economic system, a gradual improvement of its elements. Profound changes have taken place in both physical and human capital, in technology, forms of ownership and institutions. Physical capital here is based on high technologies. E-manufacturing, large-scale computerization and robotization free people from the need to take a direct part in production processes and enable them to regulate and control these processes. Hence the growing demands on the intellectual and educational level of the working population and increasing intellectualization of production, labor and products. Individual ownership is losing its former importance as it gives way to collective forms of ownership (cooperative, joint stock, partnership, corporate, mixed). There is a significant increase in the role of institutions, especially the state, which helps to overcome the shortcomings of the market and gives a social orientation to the market economy. Accordingly, the post-industrial economic system has a "social" and "mixed" character. In fact, we are dealing with a new, mixed economy.
The differences between developed countries are primarily manifested in the degree of government intervention in the economy. Hence, there are several models of a mixed economy: American, German, Japanese, Swedish, Korean, and others. The most liberal one is the American model, and the least liberal, the Swedish model.
The economic development process depends in large part on the initial level. For example, economically backward and developing countries can use the existing experience of developed countries, their technological and institutional achievements, etc., while developed countries have no such opportunity.
In the developed countries, the current financial crisis may adjust the direction of economic development, bringing the service sector into greater balance with the industrial sector of the economy, optimizing economic growth rates, government regulation of the economy, etc. Overall, the share of high technology industries will resume its growth, and the importance of education, knowledge and human capital will continue to increase. Informatization, computerization and robotization processes will accelerate still further, and transport and communications facilities will improve. The process of transition to sustainable economic development will be completed, for which purpose great attention will be paid to the creation of environmentally clean technologies and the search for and use of new sources of energy.
Developing Countries
Developing countries are those with a market economy and a low level of economic development. Countries in this group differ markedly from each other in terms of economic development level, and their differentiation along these lines is continuing.
According to the U.N. classification, the group of developing countries is divided into the least developed countries and newly industrialized ("rapidly developing") countries; oil exporting countries are singled out into a special subgroup. Under the classification of the Organization for Eco-
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nomic Cooperation and Development (OECD), developing countries are grouped into low-income countries, middle-income countries and newly industrialized countries; oil exporters are also singled out into a separate subgroup.
The latter, with their huge oil revenues, have been able to modernize the economy and raise living standards and education levels. But measures taken by the developed states to reduce energy intensity, implement energy-efficient technologies and increase the production of energy resources have significantly weakened the monopoly position of these countries.
The newly industrialized countries have managed to develop manufacturing, especially its export sectors, and are gradually increasing their competitiveness.
The least developed countries are characterized by the lowest living standards (extremely low income, very poor living conditions, unsatisfactory state of health, inadequate education or its complete absence, high child mortality rate, low life expectancy, etc.). Their economy is based on backward, including archaic, forms of agriculture; industry is very poorly developed, and exports mainly consist of traditional products.
Countries with Transition Economies
Countries with transition economies (transition countries, transition economies) are those which have rejected the administrative-command system and have taken the path of building a market economy. Although these processes differ significantly from country to country, they have the same goal: to accelerate economic development based on an optimal combination of market and government regulation of the economy, i.e., to build a mixed or new economy.
The first attempts to transform the planned economy were made in the 1950s in Yugoslavia, and then in the German Democratic Republic, Czechoslovakia and Hungary. Serious economic reforms, which eventually produced significant results, were launched in China in 1978.
Large-scale transformations leading to momentous political changes, which to some extent continue to this day, began in the Soviet Union in 1989. They have affected all countries of the communist camp and are thus usually known as "post-communist transformation."4 On the path of reform, these countries have already overcome many difficulties and achieved some successes.
The post-communist transformation process in most countries proceeds against the background of a radical collapse of the old system, which is why its first stage always involves an economic recession and accelerating inflation processes caused by hidden inflation. One can say that the initial stage of transition to a market economy takes place in conditions of transitional stagflation.
The post-communist transformation involves profound institutional changes. Formal institutions change faster than informal ones. For example, there are changes in such formal institutions as the legislative and regulatory framework and the structure and functions of economic regulatory agencies; a market infrastructure is created, etc. Changing informal institutions include established traditions, human behavior, aesthetic and ethical values. Of great importance is the transformation of the type of man known as homo soveticus, formed in the communist countries, into homo economi-cus.5 Naturally, this fundamental process cannot take place immediately because people's mentality remains the same for a long time. As a result, the transformation gives rise to a new type of man who could be called homo transformaticus, a man who has not yet developed into homo economicus but is no longer homo soveticus (an economic agent of the Soviet period, a "delets" in the sense given to this word by Vladimer Papava).
4 L.T Geiger, Macroeconomic Analysis and Transitional Economy, Eastern College, St Davids, 1992.
5 See: V. Papava, Necroeconomics: The Political Economy of Post-Communist Capitalism (Lessons from Georgia),
iUniverse, Inc., New York, 2005.
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Based on the regularities of market transformation, the following changes are implemented in the transition period: price liberalization; elimination of the state budget deficit; reduction and elimination of inflation; creation of a legislative framework appropriate to a market economy and its improvement; introduction of a national currency (in countries which had no such currency); liberalization of foreign trade; formation of a stratum of industrialists; privatization; restructuring of the monetary and financial system (creation of a new banking system and a capital market); restructuring and improvement of the tax system; creation of a social protection system; implementation of an anti-monopoly policy and increase in competitiveness; improvement of government regulation of the economy; recovery from the economic crisis and maintenance of steady growth rates; state budget participation in financing priority industrial projects, etc.
There are two ways of post-communist transformation: shock therapy and gradualism. Under shock therapy, the changes should be implemented in a very short time, which implies a tight monetary policy in the conditions of a fight against the budget deficit and a fixing of the nominal money supply or the exchange rate. Gradualism means gradual, step-by-step reforms. The first way was applied in Germany after World War II, and then in Poland and, with varying success, in other post-communist countries. The second way was successfully applied in China and is now being implemented in Tajikistan.
Problems of Economic Development in Georgia
Since Georgia gained independence almost 20 years ago, its economy has developed unevenly, with both successes and failures. This process can be divided into several stages.
The first stage covered the period from independence to the second half of 1994. At that time, the country had to restore its statehood with a simultaneous transition to a new economic system. All of this had to be done against the background of internal political tensions and a war to maintain territorial integrity. The country's economy fell into the hands of various criminal groups, suffering irreparable damage. The authorities managed to alleviate the severe social and economic problems mainly through foreign aid and loans.
An important point is that the economic reforms at the first stage were not comprehensive, and the authorities committed many strategic mistakes. For example, it was decided to use a shock therapy approach based on the Russian model. But first, the country at that time had no monetary system of its own, and second, the shock therapy itself was incomplete and inconsistent. In particular, one of its most important and necessary elements—a tight monetary policy—was not put into effect. No serious measures to restrict the money supply and cut budget spending were taken either when Georgia was still in the ruble zone or later, after the introduction of the coupon (kupon). On the contrary, there was a totally unwarranted issue of currency and government securities, and foreign loans were misused. This version of reform can be called semi-chaotic, which was due to many objective and subjective factors operating at that time (initial steps to establish statehood, lack of experience in implementing reforms, the need to take into account various political and clan interests, the internal war and the war for territorial integrity, provision of social assistance to refugees, banditry, racketeering, corruption, and many other factors). It brought the country to an economic crisis.
In spite of this, a number of important measures were carried out to ensure the transition to a new economic system: price liberalization, creation of a national monetary system, reform of land use in agriculture, housing reform, small-scale privatization (first phase), etc.
The second stage lasted from the second half 1994 to 1998. At that time, a new reform policy based on a program developed by Georgian economists and international organizations (primarily the International Monetary Fund) was launched in the country. This made it possible to curb the inflation
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of the coupon, paving the way for the introduction of a national currency, the lari. After its introduction, inflation was reduced still further, and the exchange rate between the national currency and the U.S. dollar stabilized.
In addition, at that stage:
1. The legislative framework for transition to a market economy was significantly improved and expanded;
2. The privatization of small and medium-sized enterprises was largely completed;
3. A reform of land ownership was carried out;
4. The state budget deficit was reduced;
5. The inflow of foreign investment increased;
6. The monetary system improved;
7. A floating exchange rate was introduced for the lari;
8. The investment climate improved, etc.
As a result, the collapse of production was halted, giving way to a positive trend: in 1996-1997, the gross domestic product grew by an average of 11% a year under a strong national currency and low inflation.
The third stage began in 1998 and lasted until 2004. In 1998, the previously achieved high rates of economic growth began to decline, and this was followed by a decline in the value of the national currency, rising inflation, and a budget, financial and energy crisis. The main cause of these negative processes was a slowdown in the economic reforms due to ineffective government regulation.
The fourth stage began after the Rose Revolution and lasted until the Russian-Georgian war (from 23 November 2003 to 8 August 2008). In that period, some obviously negative phenomena characteristic of earlier periods, especially the end of the previous stage, were eradicated. In particular:
1. The financial and budget crisis was overcome (the budget deficit was eliminated, pension and wage arrears were paid off, etc.);
2. The national currency strengthened significantly;
3. The energy crisis was overcome (uninterrupted electricity and gas supply to households and enterprises was restored);
4. GDP growth rates averaged 9-10%. In real terms, GDP grew by 42.6%;
5. Household income increased and average wages more than tripled while inflation stood at 37%;
6. Most highways and urban roads were repaired;
7. The macroeconomic situation continued to stabilize; the tax code and licensing and authorization procedures were simplified and liberalized;
8. The privatization process deepened; the banking sector strengthened.
But there were also certain shortcomings characteristic of that period. In particular:
1. The principle of inviolability of private property—the cornerstone of the market economy— was undermined;
2. The de facto abolition of antimonopoly legislation led to a decline in competition, threatening the further development of the market economy;
3. The trade deficit continued to increase;
4. The forms and methods of macroeconomic management did not fully meet market requirements. The reforms were not systemic.
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The fifth stage began after the Russian-Georgian war and takes place against the background of the world financial crisis. Naturally, both these large-scale phenomena would have had a strong effect on the economy of any country. To Georgia's credit, one must say that its economy has stood these two blows, which have not developed into a full-scale economic crisis. But their consequences are nevertheless in evidence:
■ According to preliminary data, the war caused damage to Georgia in the amount of $1 billion;
■ Economic growth slowed as the result of a reduction in both domestic and foreign investment;
■ The lari exchange rate began to decline, causing a rise in the prices of imported products;
■ Problems in the banking sector led to a contraction of credit and, consequently, of investment; the construction business was almost on the verge of bankruptcy;
■ The environmental situation in the country worsened;
■ The health resort sector suffered significant losses, etc.
For our economy, the negative aspects resulting from misguided reforms implemented over the years are much more significant. The most important of these are:
1. Low level of development of market institutions, which results in ineffective operation of the market mechanism. Special mention should be made of the low development level of the securities market (stock exchange), which has a strong negative impact on domestic investment;
2. The creation of a non-progressive structure of the economy. This applies both to its sectoral structure and to the structure of business and the social sphere;
3. Low national competitiveness.
In order to remedy the situation, the reforms should be further accelerated. They should be systemic. Special attention should be paid to the development of the real sector of the economy, with a significant part of foreign aid channeled into this sector. An infrastructure for government support of small and medium business should be created without delay, combined with certain protectionist measures. At this stage, it is necessary to prepare, with the participation of researchers, an economic development program for Georgia that would provide a basis for further development of the national economy.
C o n c l u s i o n
Economic growth means a quantitative increase in the size of the economy, while economic development means its improvement, a transition to new properties. In the short term, economic growth and economic development can exist without each other, but in the long term it is economic development that creates conditions for further economic growth.
The special role of natural resources is expressed in the fact that new types of resources (such as nuclear energy, solar energy, bioenergy, etc.) that are often of great importance to economic development are harnessed in the course of economic activity; quantitative and qualitative changes in physical capital consistently reduce the share of manual labor in the process of production and its direct impact on the nature of output. Hence an increase in the control function performed by man in the process of production as it requires intellectual rather than manual labor.
Economic development is a process of innovation both in physical capital and in the forms of industrial organization, human capital, technologies, institutions, etc.
The ecological (environmental) factor in economic development reflects the economic impact of the requirements of rational nature management and environmental protection, because compliance with these requirements causes significant qualitative changes in the economy.
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Globalization means increasing competition, but at the same time it leads to greater cooperation between actors in the global market and between states. That is why instead of rejecting globalization out of hand the states should try to win out in the competition. Unless this is done, the country may face economic collapse, followed by degradation of science, culture, traditions, etc.
It is impossible to speak of economic development based on only one category of indicators. Economic, social and qualitative indicators should be considered separately.
Economic development takes place under any economic system and in countries at any level of development. The only significant difference lies in its goals and objectives.
In the developed countries, the current financial crisis may adjust the direction of economic development, bringing the service sector into greater balance with the industrial sector of the economy, optimizing economic growth rates, government regulation of the economy, etc. Overall, the share of high technology industries will resume its growth, and the importance of education, knowledge and human capital will continue to increase. Informatization, computerization and robotization processes will accelerate still further. Transport and communications facilities will improve. The process of transition to sustainable economic development will be completed, for which purpose great attention will be paid to the creation of environmentally clean technologies and the search for and use of new sources of energy. Although transformation processes in transition economies differ significantly from country to country, they have the same goal: to accelerate economic development based on an optimal combination of market and government regulation of the economy, i.e., to build a mixed or new economy.
Georgia needs an acceleration of the reforms. They should be systemic. Special attention should be paid to the development of the real sector of the economy, with a significant part of foreign aid channeled into this sector. An infrastructure for government support of small and medium business should be created without delay, combined with certain protectionist measures. Today it is necessary to prepare, with the participation of researchers, an economic development program for Georgia that would provide a basis for further development of the national economy.
