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Elguja MEKVABISHVILI
D.Sc. (Econ.), Professor, Head of the Chair of Economic Theory, Ivane Javakhishvili Tbilisi State University (Tbilisi, Georgia).
TOWARD A GLOBAL ECONOMY: THE PROSPECTS FOR FORMING AND DEVELOPING AN INNOVATIVE ECONOMY IN GEORGIA
Abstract
This article takes a look at some of the special features of incorporating the Georgian economy into the globalization processes and analyzes the external and internal conditions of this integration. It examines different alternatives for integrating the Georgian economy into the global economy, focusing particularly on the problem of regional integration, which implies creating a Common Central Cauca-
sian Market with the participation of the three Central Caucasian countries and, in so doing, incorporating them into economic globalization.
The article raises the question of the need for a drastic change in the economic development model and for a transition from the widely declared so-called Singapore model to the European model of a regulated market economy. It associates the
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prospect of further economic progress in Georgia with the formation of an innovative economy based on intellectual labor and innovative activity.
It examines the main factors, contradictions, and results of the transition of Georgia's present-day economy to a path of innovative development.
Introduction
Reform of the post-communist system is still going on, which is affecting Georgia's integration into the global economy and giving rise to profound contradictions. Present-day world practice confirms that no country can evolve without complying with the fundamental principles of globalization. Based on this, the country's full-fledged incorporation into globalization is a strategic goal which, along with the task of successfully completing the reform, defines the strategic logic of Georgia's economic development. It is important that the country keep its identity and uniqueness intact while engaging in these processes. It is universally accepted that when undergoing general civilizational development, countries should retain dialectical unity between their common features of socioeconomic development and their unique traditions and culture. Correspondingly, hypertrophying another country's albeit successful experience and its perfunctory duplication when building a new economy and new society is just as unacceptable and detrimental as when a country hyperbolizes its unique features and endlessly calls for so-called sovereign democracy.
The political leadership and sociopolitical elite should not only set themselves a strategic goal, but also define the long-term objective of the country's socioeconomic development—rebuilding society in keeping with a model of development that will best unite Georgia's old traditions and rich culture with post-modernistic innovative approaches.
Some External Political and Economic Aspects of Integrating Georgia into the Global Economy
Georgia's participation in globalization requires resolving many urgent and controversial issues: how willing is the country to yield some of its national sovereignty in exchange for this participation? How do the penalties incurred from loss of some of its economic and political independence tally with the benefits gained from globalization? How should the country be incorporated into glo-balization—independently or by participating in regional associations?
Georgia is a country oriented toward European values, and its gravitation toward Europe has a long history. It is obvious that the most acceptable and natural path to globalization is restoring historical justice and returning the country to the European family, which implies Georgia's prospective membership in the European Union. Integration into the European Union should be a priority strategic task for any Georgian political force that comes to power. Nevertheless, this is a very long and complicated process which entails reaching the high standards of the so-called Copenhagen Criteria.
The most important of these economic criteria is per capita GDP, which at present in the European Union amounts to an average of $22,000. In the European Union's poorest countries—Portugal and Greece—these indices amounted to 50% and 55% of the general EU level at the time they joined the union, respectively. For any new country expressing the wish to join the European Union, this index should be no lower than 40-45%. It is clear that integration into the European Union of a post-communist country like Georgia requires fundamental preparations aimed at creating the proper con-
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ditions in all spheres of public life and, on that basis, ensuring a breakthrough in socioeconomic development. It will be an important step for the five post-Soviet countries (Georgia, Ukraine, Moldova, Azerbaijan, and Armenia) if the European Union grants them associated membership. At the first stage, this would imply more lenient trade conditions with the EU.
Unfortunately, at present, declaration of tasks to facilitate Georgia's integration into the EU is often accompanied by practical steps that not only are failing to bring the country closer but, on the contrary, are moving it further away from fundamental European values. One such step is total deregulation of the economy, in the wake of which (after 2004) most of the regulating structures were abolished.1 Elimination of the antimonopoly service and amendments to the labor legislation that foster total violation of the rights of hired workers are particularly unacceptable in this context.
In this respect, Georgian legislation directly contradicts the labor legislation of European countries. At present, monopsony is typical of Georgia's labor market and other markets are characterized by the same high level of monopolization, which significantly reduces public prosperity.
There is an objective need for a drastic change in the economic development model and a transition from the so-called Singapore model to the European model of market economy regulation. Within the framework of this approach, we suggest drawing up a mega project with the participation of scientists from different spheres provisionally called "Return to Europe: Steps on the Way to Integration into the European Union" and developing optimistic, pessimistic, and neutral scenarios for bringing Georgia's most important socioeconomic indicators closer to the Copenhagen Criteria.
The most interesting of the different alternatives for integrating Georgia into the global economy is the one that implies creating a Common Central Caucasian Market involving the three Central Caucasian countries,2 thus incorporating them into the globalization processes.3 As we have already noted, three of the five post-Soviet countries, with respect to which the European Union is discussing associated membership, represent the Central Caucasus, which clearly shows that Europe perceives the Central Caucasus as a single region. Developing economic integration in this region is vitally important. Moreover, European strategists often consider the Central Caucasian region to be closely related to the Central Asian region, which expands the framework of future subregional integration even more.4 Keeping in mind the above, Professor Vladimer Papava offers a new term "Central Cau-caso-Asia,"5 which is a combination of the two words "Caucaso" (from "Caucasus") and "Asia." He writes: "When talking about Central Caucasia as a single region, it should be noted that its lack of political and cultural homogeneity prevents it from becoming integrated."6 Indeed, taking into account the acute and profound crisis between two of the Central Caucasian states, Azerbaijan and Armenia, the prospect of economic integration in this region appears even more remote. Despite this, the policy of the Central Caucasian states should rely on the principle "from peaceful settlement of controversial issues to sustainable integration." To put it differently, "ways to establish strategic economic partnership (and not simply cooperation) in the Central Caucasus are becoming of paramount importance."7
In the globalized world, the prospects for Georgia's development as a post-communist country are largely determined by external factors, although in addition to them an important role is played by internal conditions that can only be incorporated into the socioeconomic development model on the
1 See: N. Khaduri, "Mistakes Made in Conducting Economic Reforms in Postcommunist Georgia," Problems of Economic Transition (New York), Vol. 480, No. 4, 2005.
2 See: E. Ismailov, V. Papava, The Central Caucasus. Essays on Geopolitical Economy, CA&CC Press AB, Stockholm, 2006, p. 7.
3 See: Ibid., p. 98.
4 See: E. Ismailov, V. Papava, Tsentral'nyi Kavkaz. Istoria. Politika. Ekonomika, Mysl Publishers, Moscow, 2007, pp. 95-96.
5 E. Ismailov, V. Papava, Tsentral'naia Evrazia. Geopoliticheskoe pereosmyslenie, Stockholm, 2010, p. 75.
6 Ibidem.
7 E. Ismailov, V. Papava, The Central Caucasus. Essays on Geopolitical Economy, p. 98.
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basis of a new paradigm. In this model, Georgia's current reality must be kept in mind, the economy of which has been functioning throughout the country's years of independence within the framework of an inert model that relies on old relations and its former potential.
Georgia's present-day economy is income-driven, the theoretical essence of which has been analyzed in depth in works by well-known French economist, Professor Ivan Samson.8
The gradualist path of development, i.e. the preservation and use of old organizational structures, is essentially unrealizable in Georgia today. The only acceptable path is modernization9 of the economy and the whole of society along with it, which implies implementing high technology and promoting an innovative breakthrough, bypassing all transition forms and structures.
Shift in Paradigm of Economic Development: Transition to Building an Innovative Economy
In contemporary economic literature, socioeconomic progress is often viewed as a transition from one stage of competitive development to another. The following stages are designated:
(a) an economy oriented toward production factors (foreign financial resources and cheap manpower are singled out in particular);
(b) an economy oriented toward production investments; and
(c) an economy oriented toward innovations based on intellectual labor and innovative activity.
The transition of Georgia's present-day economy to the innovative sphere is intrinsically related to resolving two groups of problems:
(a) creating objective and subjective conditions for successfully carrying out an innovative breakthrough and
(b) developing ways, methods, and tools for carrying out this process.
The first group is related to an analysis of the current stage of education and science in Georgia and an assessment of the efficiency of government policy in these spheres.
Georgia has long been known for its rich educational and scientific traditions and developed scientific and intellectual potential. As early as the 12th century, two academies were founded in which students, along with acquiring theoretical knowledge, also learned how to apply it in practice. In Soviet times, illiteracy was entirely eliminated. Georgia ranked among the top countries in terms of number of students and pupils, and not only in the Soviet Union, but also throughout the world.
Science as a vital economic resource and the main driving force behind contemporary society is intrinsically related to the education system. Until the 1990s, Georgia had significant potential and a wealth of advanced experience, which is shown by the data presented below. By 1990, 29,000 scientists were engaged in science in Georgia, including 1,400 doctors of science and more than 11,000 PhDs. Around 6,000 researchers were engaged in scientific activity at the institutes of the Georgian Academy
8 See: I. Samson, "Medium-Term Prospects for the Georgian Economy," Georgian Economic Trends, February 2008; idem. "The Search for a Development Path: Challenges for Georgia," Georgian Economic Trends, March 2006.
9 Modernization in the classical understanding means a transfer from a traditional to a contemporary society, the development of which is defined by public institutions. Present-day Georgia has already gone through this kind of modernization. Correspondingly, by modernization we mean the need for a postmodern transition, the gist of which is transferring to a post-industrial society.
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of Sciences, including approximately 450 doctors of science and more than 3,000 PhDs. A total of 115 scientific-research institutes and four R&D organizations were in operation. These indices are extremely high for a small country with a population of only 4.5 million people. Georgia's academic schools of mathematics, physiology, psychology, physics, and medicine enjoyed world renown.
The destructive processes of reform of the post-communist system in Georgia had an extremely negative effect on the development of science. By 2007, the number of scientific institutions dropped to 92, while R&D organizations were eliminated altogether. The number of researchers dropped by more than half. At the same time, science "aged." For example, the share of scientists older than 65 increased from 23.4% to 29.2%.
At present, science in Georgia is in a state of deep stagnation, one of the most important reasons for which is the state's insufficient attention to this sphere. Fundamental studies and their funding are considered too much of an extravagance for a small country facing the problems of systemic reform. It is thought that priority should be placed on incorporating the results obtained in science in developed countries. This approach, which we believe to be erroneous, is reflected in the practice of funding scientific projects. For example, in 2010, the state budget allotted only 7.74% of the total amount allocated for the Ministry of Education and Science, 0.69% of the total budget funds, and 0.22% of the country's GDP to scientific research programs.10
In terms of these parameters, Georgia not only lags far behind the advanced countries, but also behind the average world index. Every year the world spends 1.7% of its GDP on scientific research, whereby developed countries spend 2.3% and developing countries 1.0%.
In Georgia, per capita spending on science amounts to approximately $6.2, whereas the average amount throughout the world is $170.6. GDP in terms of parity purchasing power (PPP) per capita in Georgia amounts to $4,700, while throughout the world it is approximately $9,800. Consequently, while Georgia lags economically behind the average world level 2.1-fold, in terms of spending on science, it lags behind 27.5-fold. With respect to specific countries, it lags economically (per capita GDP) behind the U.S. 10-fold and in terms of spending on science 194.5-fold; behind Germany 7.4-fold and 136.1-fold; behind Japan 7.2-fold and 195.4-fold; behind Israel 5.9-fold and 205.3-fold; and behind Latvia 3.7-fold and 17.4-fold, respectively.
In 2007, the world spent $1,137,900 on scientific research, which was 44.3% higher than the same index for 2002. It should be noted that in the indicated period, world GDP rose by only 25.6%. So the increase in spending on science was higher than the increase in the world economy. The developed countries accounted for 75.9% of the total spending on science, whereby the U.S. and Canada accounted for 34.7%, the European Union for 22.9%, and the CIS countries for only 2.4%.
In addition to science, spending on education is impermissibly low in Georgia, amounting to 3.2% of budget expenditures and falling significantly behind the same indicators for developed (Germany—4.6%, the U.S.—5.3%, Israel—6.9%, and so on) and for most of the post-Soviet countries (Russia—3.5%, Latvia—5.1%, Belarus—6.1%...). In terms of aggregate spending on education and science, Georgia lags far behind the recommended U.N. minimum permissible level for this index (6% of GDP) and the index for developed and most of the post-communist countries (in the U.S., it is 8.0%, in Germany—7.2%, and in Israel—11.4%).
A priority vector in the economic development of present-day Georgia is not innovative production based on high technology, but performing transit and tourist functions, which in no way helps to solve the task of efficiently incorporating Georgia into the global economy. Based on this, a drastic change in economic policy and making an innovative economy the priority of the country's rational state development strategy are of utmost importance. So a National Innovative Strategic Initiative project must be drawn up, within the framework of which a mid-term Innovative Georgia— 2025 project should be singled out. This project could focus on the following:
10 These and all the subsequent data are taken from the documents of "Saqstat"—the Georgian National Statistics Service.
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■ Capitalizing on and institutionalizing the national intellect.
■ Forming strategic thinking and vision.
■ Promoting the emergence of an innovative culture in society.
■ Creating an efficiently functioning educational system.
■ Ensuring institutional, legal, organizational, and financial-economic conditions for developing science.
The project could be divided into three stages lasting five years each. Each stage should end in specific results that will signify the launching of the next stage. For example, the main result of the first stage should be creating the necessary institutional environment for an innovative economy in the context of macroeconomic stabilization in the country. The main content of the second stage should be launching the driving force of an innovative economy and ensuring economic growth on a qualitatively new technological basis. At the final third stage, functioning of a highly effective economic system based on the latest technology and network organization of production should be achieved, which will ensure a high standard of living for all the citizens of Georgia.
A particularly important task is to provide resource support of the formation and development of an innovative economy. A significant resource is the high intellectual potential that the country still possesses. However, although it is a necessary component, it is still not enough to make an innovative breakthrough. Large investments are needed, primarily in modern technology, without which the existence of an innovative economy is impossible.
Conclusion
In today's world, there are several models for implementing high technology which imply both attracting foreign capital and mobilizing internal resources to achieve this goal. The most acceptable model for Georgia, in our opinion, is developing small and medium innovative companies and ensuring their leading role in the country's economy. World experience shows that small venture enterprises play a vital role in the development of innovative business.
Innovative business support in many countries has led to the creation of an efficiently functioning economic system. Keeping in mind this experience, it is the state that should play the role of main catalyst in forming an innovative economy, which will make it possible for the republic to become rationally incorporated into the globalization processes and occupy the niches that are still free in the world (regional) market of high-tech and scientific-intensive commodities.
