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with foreign partners in a simplified regime, abolishment of state monopoly on foreign trade, and introduction of new forms of international economic cooperation. Within the framework of perestroika, planned economic reform set itself the goal of bringing foreign investments into the country and stimulating the import of production means. Optimization of the import structure and foreign investments was to promote further development of the production sphere. In reality, this expectation was not justified. Foreign investments went into the service sphere, rather than production, and joint ventures and enterprises with a share of foreign capital emerged among the new forms of foreign economic cooperation. From this time until the present, trade has been most popular service sphere. There are two reasons for its popularity: first, it takes less capital to begin operating and, second, the end results are not long in coming.
In present-day Georgia, the high interest of specialist-theoreticians, practical experts, and the whole of society in short-term economic benefits is related to the interdependence between these benefits and the larger workforce. The rapid onset of the end results of economic activity is also important, while an economic crisis is going on in the country and there is still an extremely tense social background.
C o n c l u s i o n
In present-day post-communist Georgia, the labor market is in a state of spontaneous formation, there is an imbalance in labor supply and demand, and the cost of labor along with the cost formation mechanism are far from perfect.
In these conditions, while trying to overcome the economic crisis, a healthy competitive environment must be created, discrimination abolished and not permitted in the future, a balance in labor supply and demand achieved, demand stimulated primarily by creating new jobs, and supply stimulated by helping the unemployed to find jobs, on the one hand, and by protecting the rights, choice, and interests of the employed, on the other.
George BERULAVA
D.Sc. (Econ.), Professor at Paata Gugushvili Institute of Economics
(Tbilisi, Georgia).
THE COMPETITIVENESS OF HUMAN RESOURCES: EVIDENCE FROM GEORGIA
Abstract
T
he goal of this paper is to provide in sight into how Georgia can increase its productivity and give its human re-
sources and companies specialized advantages. In this study, the current situation and reforms in relevant areas such as eco-
nomic development and education are described. The existing problems and opportunities in these spheres, as well as the role of each stakeholder and their potential to contribute to the enhancement of
Georgia’s human resource competitiveness are identified. On the basis of the analysis, some policy recommendations for both the government and the private sector are elaborated.
Problem Statement
Gaining a competitive edge is one of the central tasks facing Georgia on the path of economic development. Competitiveness is the capacity of a nation to attain higher productivity levels and gain large shares of both export and domestic markets. Worldwide experience suggests that the prosperity and development of nations—especially small, developing economies—depends not so much on their initial natural resources as on their ability to gain a competitive advantage through continuous innovation and upgrading of domestic industries. This ability in turn depends on how well a nation can provide a “home base” for the businesses which . .will be the location of many of the most productive jobs, the core technologies, and the most advanced skills.”1 Human resources are among the key factors that constitute such a “home base” and thus determine the competitiveness of a country.
The competitive potential of a country’s human resources means not only the number and cost of personnel, but also the sophisticated skills acquired through higher education and advanced research and training, the creativity and commitment of managers in deploying resources, and the ability of managers to convert human capital into a superior consumer good and achieve customer satisfaction.
A variety of factors determines the competitiveness of a nation’s human capital. These are: general socioeconomic factors, such as the macroeconomic situation, economic development policy, poverty and equality; the reliability of health and education systems; and the efficiency of human resource strategies employed by individual companies. Various actors or stakeholders are responsible for ensuring that these factors are in place. Thus, competitiveness in the field of human resources requires close cooperation among the main stakeholders, i.e. the government, the private sector, and the labor force.
The goal of this paper is to provide insight into how Georgia can increase its productivity and give its human resources and companies specialized advantages. We will start by describing the current situation and reforms in relevant areas such as economic development and the secondary, vocational, and higher education systems. Second, we will identify the existing problems and opportunities in these spheres. Third, the role of each stakeholder and its potential to contribute to the enhancement of Georgia’s human resource competitiveness will be discussed. Fourth, some policy recommendations for both the government and the private sector will be elaborated.
The Current Situation
In this section, we will take a look at the current situation in areas that determine the competitiveness of human resources.
Economic Situation: During the period following the breakup of the Soviet Union in 1991 and gaining independence, Georgia faced severe shocks from disruptions in its trade relations and energy imports. In the mid 1990s, the Georgian authorities achieved macroeconomic stability through implementing a “stabilization program” and, later, the 2003 Rose Revolution provided a new stimulus for economic development. The ambitious reform program launched by the government was focused on combating corruption, improving governance, and enhancing the business environment in Georgia.
1 M.E. Porter, “The Competitive Advantage of Nations,” The Free Press, New York, NY, 1990, p. 19.
THE CAUCASUS & GLOBALIZATION
The high rankings Georgia received from the World Bank,2 as well as the stable rates of real GDP growth, indicate that significant advances were achieved in the reform of the business environment.
The recent economic upsurge, however, has not resulted in a serious enhancement of employment variables. The main trends in the employment sphere remained a decrease in the labor force participation rate and an increase in the unemployment rate. It should be mentioned that the Georgian employment structure underwent significant changes during this transition period. The first effect of the transition process on employment patterns is reflected in the reduced influence of the state-owned sector on employment. Second, the share of the self-employed in the employment structure has been increasing substantially at the expense of the share of those officially employed. Another important change in the employment structure was the shift from industry and services (broadly defined) sectors to the agricultural sector. During the period under review, the employment share of agriculture more than doubled, while the share of industry dropped substantially.
It is important to understand that growth in employment, particularly self-employment, in advanced transition economies and developing countries is usually associated with the expansion of small and medium businesses. Economic reform reduces or eliminates bureaucratic obstacles, hence making it possible for small and medium businesses to expand their operations, create new jobs, and increase employment and output. But this was not the case in Georgia. Unlike other advanced transition economies, the increase in the share of self-employment in Georgia is related mainly to activities in the agricultural sector. Taking into account the fact that these activities are oriented mainly toward self-consumption and that a significant portion of “self-employed agriculture workers” are unpaid members of farm families, we can conclude that increased self-employment in Georgia in fact only reflects disguised unemployment.
In the context of recent developments in the labor market, it is not surprising that the economic upsurge has had negligible effect on poverty and inequality. Both the absolute poverty level—percent of the population living below the subsistence minimum—and inequality decreased only slightly during the period under review. Georgia still has one of the poorest performances among Central and Eastern European countries (CEE) and the former Soviet Union (FSU) republics on both counts. We believe that this is mainly due to the fact that recent economic growth failed to stimulate formal employment and to alleviate the unemployment problem.
One important factor in attaining international competitiveness is productivity growth. Productivity reflects the level of education of the labor force and advances in technology and is a good measure of the sustainability of economic development. While in recent years Georgia showed positive rates of labor productivity growth, the efficiency of the Georgian economy is still very poor. The GDP per capita in Georgia remains at one of the lowest levels among transition economies. The average per capita income in Georgia is lower than other former Soviet Union republics and significantly lower than that of the Central and Eastern European or Baltic countries. Georgia’s labor productivity is also weaker than that of other transition economies. For instance, labor productivity in Georgia is approximately a third of that in the CEE countries (the Czech Republic, Hungary, and Estonia) and a sixth of that in advanced developing countries (Hong Kong, Singapore) and developed countries (USA, Germany, and Japan).3 This low value of labor productivity explains why Georgia’s economy is not competitive and also does not speak well of the country’s economic sustainability. The competitiveness of economies is increasingly dependent on the availability of a qualified and entrepreneurial workforce. Thus the important factors that can improve national productivity levels and enhance employment variables are the quality of skills possessed by workers and the level of knowledge provided by the education system.
Education: Education plays a crucial role in providing human resources with skills and knowledge, factors which are important in promoting competitiveness and attaining the nation’s sustainable
2 See: Doing Business 2009. How to Reform, available at [www.doingbusiness.org].
3 See: Penn World Table Version 6.2, Center for International Comparisons of Production, Income and Prices at the University of Pennsylvania, available at [http://pwt.econ.upenn.edu/php_site/pwt62/pwt62_form.php].
economic growth. Education and knowledge have been highly valued in Georgia throughout its history. One vivid illustration of this is the country’s very high overall education index (0.91) and 100 percent adult literacy rate.4 However, the socioeconomic transformation process launched in Georgia in the early 1990s plunged the country’s education system into a deep crisis. Economic hardship led to a substantial decrease in funding for education, which had a very negative impact on the whole education system, such as deterioration of the education infrastructure, low motivation of teachers and other personnel, corruption, lack of teaching materials and equipment, and outdated curriculum. Moreover, the transition to a new socioeconomic system has not been accompanied by a relevant change in education strategy and methods. Instead of fostering problem-solving and critical thinking skills and abilities in students, the education system has been using routine teacher-centered methods aimed at drumming information into students’ heads.
Realizing the social inefficiency of the educational system, the Georgian government, with the support of the World Bank, launched an ambitious reform program at the beginning of the current decade. The goal of the reform was to establish advanced educational standards in Georgia using new methods of management, financing, and quality control. These reforms laid the legislative groundwork for the Law on Higher Education, adopted in 2004, the Law on General Education, adopted in 2005, and the Law on Vocational Education, adopted in 2007.5
Ambitious reform programs in all spheres of education, however, have faced serious obstacles. As a result, the outcomes of the reform sometimes fall short of the desired aim.
■ One of the main pillars of the reform was decentralizing the education system and providing educational institutions with “autonomy.” But in reality the state management of the whole public sector of science and education is still extremely centralized. The avowed “autonomy” of educational institutions remained a mere declaration that has little relevance to the real situation. MES still has strong political instruments to exercise discretionary power over the functioning of educational institutions even at the operational level.
■ There are some obstacles in the education system that impede opportunities for lifelong continuous professional career-building. For example, students pursuing a vocational education who enter professional centers without a diploma from a secondary educational institution (which the Law allows) will not be able, according to the Law, to continue their education at the next higher technical education level, as doing so does require a secondary school diploma. For these students, the chosen path becomes a dead end, as they cannot complete their secondary education at a professional center.
■ The central objectives of the ongoing reform of the education system were to replace the traditional methods, forms, organization, and structure of the education process with new “progressive” ones that would assure the quality of education. In many places, such changes were of a strictly “formal” nature and had only a negligible effect on the quality of the education processes.
■ This is especially true for graduate programs, which are often not even provided with the relevant textbooks and materials. Moreover, in many cases there are no substantial differences in content between undergraduate and graduate programs. The quality of education at the doctorate level has even decreased compared to the pre-reform period.
■ In general, higher education institutions fail to provide learning environments that stimulate independence, creativity, and an entrepreneurial approach—all of which are very important to human resource development.
4 See: UNDP. Human Development Report 2008, available at [http://hdrstats.undp.org/countries/data_sheets/ cty_ds_GEO.html].
5 For more detailed information on reform of education system in Georgia see: Georgia Human Development Report 2008: The Reforms and Beyond, UNDP, Tbilisi, Georgia, 2008.
THE CAUCASUS & GLOBALIZATION
■ An analysis of developments in the labor market reveals a substantial mismatch between the competency of graduates as they emerge from universities and other educational institutions and the qualifications and skills in demand in the market. This indicates a lack of cooperation between educational institutions and private business.
Overall, the education system, despite the ambitious reform efforts, still fails to nurture well-educated and skilled human resources capable of adapting rapidly to the changing environment.
Gaps and Opportunities
An analysis of current situation allows us to identify the following two broad groups of factors that inhibit the formation of competitive human resources in Georgia: the “demand” and “supply” factors.
The main gaps on the demand side are related to the inability of the government to provide a sustainable economic development environment, in which businesses flourish, investments based on innovations and advanced technology transfer are attracted, jobs are created, and there is a demand for skilled and competitive human resources.
Georgia has implemented major reforms aimed at improving the business environment and attaining high rates of growth. However, the quality of economic growth remains low with respect to economic and social sustainability. In particular, this growth is related neither to innovations and investments in high-tech industries, nor to expansion of activities of small and medium businesses, nor to an increase in the number of jobs and equity in income distribution, nor to a reduction of poverty. Although the improvement of the business climate has increased gross output, growth in Georgia has been mostly associated with excess absorption and credit expansion, as well as with foreign investments, mainly in the tradable sectors. The low quality of growth means that it will be very hard to sustain it in the future, especially when the privatization process, and the accompanying capital inflow, comes to an end. We identified two broad categories of factors that preclude the achievement of sustainable economic development in Georgia. These factors are “market failures” and “government failures.”
Market failures reflect the fact that the Georgian economy is stuck at a low-level equilibrium characterized by insufficient investment in innovation and technology and thus poor prospects for development. Neither market forces nor a government policy based on the laissez-faire principle can provide the push necessary to achieve a high-level equilibrium and, therefore, sustained economic growth.
Government failures in Georgia mainly concern problems in establishing and maintaining the rule of law in society and ensuring the independence and efficiency of the judicial system. Lack of confidence in the rule of law hampers incentives for long-term investment in technology development and innovations, fails to provide equal opportunities for all economic agents, and thus inhibits sustainable economic growth.
In such an economic environment, companies’ motivation to acquire state-of-the-art technologies and nurture highly valued human skills is low. Solving the existing problems, i.e. elaborating an economic development policy focused on innovation and advanced technology transfer, providing equal conditions for all economic agents, and ensuring a competitive environment represents an opportunity per se to develop demand for high-skilled, competitive human resources.
The reverse side of that coin is the failure of the economy to ensure the supply of skilled human resources even in cases when such a demand does exist. For instance, a significant portion of foreign direct investment (FDI) has gone to large infrastructure projects (the Baku-Tbilisi-Ceyhan pipeline) or real estate (hotels, recreation facilities), where the construction work was implemented mainly by “imported” labor force. The fact of the matter is that the local labor market failed to provide human resources with the skills required to fulfill these projects. Despite the higher costs, foreign investors preferred to use adequately skilled “imported” workers rather than cheap local human resources not equipped with the relevant skills. Thus the failure of the Georgian education system to provide the
required world class skills or to respond quickly to new market demands in part explains why recent enormous FDI inflows and accompanying real GDP growth have not created jobs or reduced poverty.
Another good illustration of the inadequacy of the Georgian education system in providing advanced skilled human resources is the situation in the Georgian wine industry. A recent competitiveness analysis of this industry, which is so important for the Georgian economy, revealed that despite favorable natural conditions, the industry has a limited ability to gain a competitive advantage in the global markets.6 One of the key factors that hampers the competitiveness of the wine industry is the lack of advanced human skills. While Georgia appears to have an advantage in low-skilled labor, both in terms of cost and availability, there is a substantial disadvantage with regard to the availability, quality, and cost of high-skilled human resources. First of all, there is a major lack of highly qualified wine technologists, vineyard managers, and marketing specialists. The shortage of skilled workers is to a large extent interrelated with poor vineyard management and the inability to fully exploit Georgian land advantages. Though there are special research institutes, such as the Institute of Winemaking and Winegrowing and some specialized educational institutions in Georgia, their impact on the efficiency of the wine industry has been very low, according to experts. The more advanced companies prefer to train specialists and acquire advanced knowledge and technologies from abroad. This partially explains the Georgian wine industry’s lack of skilled human resources, advanced technologies, and vineyard management practices. It is noteworthy that the situation in other Georgian industries with respect to the availability of advanced skilled human resources is about the same as that facing the wine industry.
We have already discussed the main deficiencies and gaps in the Georgian education system in the previous section. Clearly, the enhancement of this system represents a major opportunity to ensure more competitive human resources. However, we would like to stress one opportunity that is very important for providing productivity and competitiveness of human resources. We think that establishing strong links between the private sector and educational institutions will significantly facilitate the growth of human resources equipped with the skills and competences that are in demand in the market place.
We will discuss the role of each stakeholder in this process in the next section.
Potential Role of Each of the Relevant Stakeholders
As worldwide experience suggests, in order to successfully nurture a nation’s competitive human resources, cooperation among the main stakeholders, i.e. private business, the government, and the labor force, is required.7 An analysis of the business environment in Georgia suggests that the relations among the main stakeholders are governed by distrust rather than cooperative values. Each actor tries to maximize its own benefit (i.e., the government—tax revenues, labor—salaries, private business—short-term profits) at the expense of maximizing the benefits for the whole network. Thus promoting cooperation among the main stakeholders to create joint values, activities, and policies focused on achieving long-term competitiveness is one more opportunity for human resource development. Below we shall discuss the role of each stakeholder in this process in more detail.
The government should play an important role in the promotion of a collaborative network aimed at fostering competitive human resources, affecting both “demand”- and “supply”-sides.
6 See: G. Berulava, “The Impacts of the Free Trade Agreement with the European Union on the Georgian Wine Industry: A Competitiveness Analysis,” GEPLAC Research Papers, December 2008, available at [http://www.geplac.org/ newfiles/law/Berulava.pdf].
7 See: J. Duffey, “Competitiveness and Human Resources,” California Management Review, Vol. 30, No. 3, Spring
1988.
THE CAUCASUS & GLOBALIZATION
The demand-side policies assume that the Georgian government will refrain from the laissez-faire principle and pursue an active economic development policy oriented toward the dynamic transformation of the production structures. The government must also create a business and legal environment that will encourage the emergence of efficient market mechanisms and provide equal opportunities for all the economic agents to expand. These measures will create a strong demand for advanced skills and highly productive human resources.
The supply-side policies influence the ability of the economy to provide competitive human capital. Taking into account the fact that the social value of education significantly exceeds private profits, under a laissez-faire system there will be a deficit of relevant education and learning. To deal with this market failure problem, the government should be a major investor in the education sector. The government should ensure the operation of a set of institutions that provide educated and creative human resources and facilitate rapid and sophisticated research and development. The government should also stimulate companies and the labor force to invest in education and human resource development.
Private business can play just as important a role in developing human resource competitiveness. Georgian companies should significantly increase their spending on staff education and training, shifting their orientation from short-term profits (using low-cost, unskilled labor) to long-term competitiveness (based on employing advanced, skilled, and highly productive human resources). Private business can also support educational institutions, providing them with the list of skills and competences badly needed in the marketplace. Another important way that private businesses can contribute to the competitiveness of the labor force is through employing advanced human resource management practices and strategies.
Like private businesses and government, the labor force must also share the responsibility for developing human resources and investing in the skills and knowledge that yield the greatest private returns. To ensure workers maintain positive attitudes and remain involved in the process of skills acquisition and productivity enhancement, the social aspect must be emphasized. It is well known from business and managerial literature that the productivity and creativity of human resources is determined by the perception of their stake in business and their perception of social justice. In this context, the Georgian Labor Code, which deprives workers of their rights in favor of employers and thus provides a basis for social injustice, could have a negative impact on the involvement of human resources in the productivity and competitiveness enhancement process.
Significant assistance in facilitating cooperation among the government, management, and labor can be provided by international organizations like the World Bank, UNDP, and others. These organizations have great worldwide experience and can directly assist the main stakeholders in developing programs that provide improved education opportunities and enhance the productivity and competitiveness of existing human resources. One good example of such assistance is the World Bank’s Enterprise Restructuring and Management Assistance project (CERMA), implemented in Georgia in the mid-1990s. This program provided an invaluable contribution to private sector development in Georgia, supplying local businesses with advanced managerial skills and increasing their competitiveness.
R e c o m m e n d a t i o n s
On the basis of the above analysis, we elaborated two broad groups of recommendations corresponding to the two aspects of the human resource competitiveness problem. The first group of recommendations is focused on the demand-side factors and aims to further the economic development process in Georgia by eliminating the obstacles created by both market failures and government failures. In particular:
■ The Georgian government must shun the laissez-faire principle and pursue an active economic development policy oriented toward the dynamic transformation of production struc-
tures. The implementation of this policy requires: identifying the sectors that will represent the basis for industrial development (this should be non-traditional export-oriented sectors, involving new technologies and knowledge); elaborating a development strategy focused on stimulating and attracting investments in selected sectors of industry; and ensuring the sound implementation of industrial policy, which means performing strict oversight of the performance of enterprises and imposing discipline.
■ The government must create a business environment that will encourage the emergence of efficient market mechanisms by stimulating the competition processes and the creation of new enterprises; providing free access to the market; actively implementing anti-trust policies; re-establishing the anti-trust agency and empowering it with sufficient authority and status to efficiently implement competition policy; establishing clear rules for market conduct for all economic agents without exception and thwarting any opportunity for non-productive or predatory activities; and eliminating any opportunity for the government to take part in the process of property redistribution.
■ Improving the rule of law by enhancing the functioning of the legal and judicial system is essential for Georgia today if it is to achieve long-term economic development goals.
The second group of recommendations is focused on the ability of the Georgian economy to supply human resources equipped with advanced and in-demand skills and competences. In particular:
■ The government should substantially increase investment in education, first of all making basic education accessible to everyone. Special policies must be elaborated to improve education and reduce drop-out rates. All of these measures are important in order to equip people with the necessary competences, including the basic skills and learning that are prerequisites for the further upgrading of skills.
■ The government should provide special incentives for the business sector to expand its participation in education and human resource development. For instance, corporate tax cuts could be tied to incentives for increased reinvestment in training and equipment.
■ To increase the productivity of human resources, the social protection of workers must be ensured. Amendments that empower workers in their relations with their employers must be made to the Georgian Labor Code. These changes in legislation must also ensure that employees receive continuous training and educational opportunities.
■ Entrepreneurial culture must be promoted at educational institutions; this requires serious changes in the governance and leadership methods of these institutions. These changes are necessary to ensure the ability of educational institutions to generate new skills in response to the nature of the new jobs, as well as to improve the adaptability of human resources.
■ The learning methods and curricula in educational institutions must be substantially changed by introducing transferable skills into the curricula at all levels of education; using better examination and quality control methods; enhancing the interdisciplinary nature of education and research; raising the social and economic relevance of learning programs; and improving the quality of programs, especially at the graduate level.
■ Close cooperation between private businesses and educational institutions must be promoted in order to eliminate the mismatch between the skills and competences offered and the skills and competences demanded. To this end, a favorable environment for cooperation between educational facilities and business must be created. Such cooperation should become a part of the strategy of the educational institutions while, in turn, private business should establish a special council to interact with educational institutions that will help to continuously identify and update/upgrade the skills demanded in the marketplace and support the advancement of education programs.
The education system must ensure continuing education opportunities by eliminating the existing obstacles in the legal and regulatory framework, e.g. by providing better transitions between secondary education and vocational education, and then higher education.
Private business must employ advanced human resource management methods oriented toward improving managerial skills and enhancing the training and development opportunities at work, e.g. skills-charting and competence-mapping methods.
Itai SENED
Ph.D., Professor of Political Science and Director of the Center for New Institutional Social Sciences
at Washington University (St. Louis, U.S.).
Marshal THOMPSON
Ph.D., Assistant Professor of Political Science at Northeastern Illinois University (Chicago, U.S.).
Robert WALKER
Ph.D., Assistant Professor of Political Science at Washington University (St. Louis, U.S.).
Ron WATSON
Ph.D., student at the Department of Political Science
at Washington University (St. Louis, U.S.).
THE MIDDLE CLASS: A NEW CONCEPTUAL FRAMEWORK AND A BRIEF APPLICATION TO THE CAUCASUS
Abstract
T
he role of the middle class in the evolution of societies, their economies and their politics is one of the oldest
topics in political economy. In this paper we suggest a new conceptual framework for the study of the middle class in an ef-
