Journal number 4 ∘ Ramaz Abesadze ∘
Stages of transformation of economic and general directions of its development in Georgia

Summary

despite 25 years from the start of reforms, we could not transfer in to the perfect market economy. It should be specially mentioned that nowadays market infrastructure is undeveloped (commodity, stock and labor markets, insurance service, investing institutions, marketing, engineering, consulting and informative services and other); economic ( industrial and agricultural production is undeveloped, level of development of small business is low, import exceeds export several times etc.) as well as social structures are non-progressive ( strong middle class has not been created yet, the level of unemployment and poverty is quite high etc). In the future elimination of the deficiencies existing in the economy of Georgia and the choice of the right way cannot be done as the result of simple inertia. The main attention should be paid to economic development that is qualitative perfection of the economy, in order to eliminate deformation of the economy. This can be implemented with the help of new i.e. innovative economy’s construction.

Key words: Post-communist transformation, innovative economy, economic rise.

Introduction

The signs of crisis were shown even before restoration of independence in economy of Georgia [Abesadze R., Arevadze N.  2011.]. Since gaining of independence the situation has been deteriorated sharply because of disruption of economic connections, non-competitiveness of our economy on the world market, political tension in the country, fundamental transformation of economic-political system (process of transformation).

Post-communist transformation in the majority of countries started with economic decline.  At the same time, in conditions of stagflation and not stagnation that was caused by sharp rise of the prices, not only on the raw, but on all types of the products simultaneously because of hidden inflation existing in the previous system. Therefore, on the first stage of transition to market economy there has been still unknown phenomenon- transformative stagflation caused by hidden intention followed by the extreme aggravation of social problems that was expressed evidently and severely in Georgia [Abesadze R. 2009.].

Stages of transformation of economy of  Georgia

The following periods of post-communist transformation can be detached:

Economic downturn that at its turn includes the period of being in the monetary zone and cupon and it was continued from the start of reforms till 1995 year. As for economic downturn, 1991-1994 years were particularly hard when the economic difficulties existing objectively were strengthened by internal wars and armed conflicts. In the years indicated above the volume of Gross Domestic Product (GDP) was reduced dramatically towards previous years: 1991-21,1; 1992-44,9; 1993-29,3; and in 1994- 10,4%. Generally, GDP in 1994 comprised only 27,5% of the rate of 1990 year. The volume of industrial product reduced even more: in 1991-23; 1992-46; 1993-37; and in 1994- by 39%. In 1994 the volume of industrial product was equal only to 16^ of 1990’s rate.[1]In indicated years the volume of agricultural production nearly halved, the magnitude of the construction decreased dramatically. The level of provision of energy decreased sharply. As in the whole economy in the sphere of energy as well the processes of destruction started. For 1994 power generation decreased twice, production of coal almost stopped, oil production fell to a critical level, forestry sector and the construction virtually ceased to function, the gas supply was cut off due to t he insolvency of such situation. The prices of consumer goods increased dramatically (the inflation rate respectively comprised by 8500% per year): in some years, the inflation rate increased in 1992-2.5, in 1993-92 times and in 1994-120 times. At the same year the minimum salary of workers in 1989 comprised the same indicator – 1,65; average salary -1,64; pension amount- 1,64% that upon the absolute value was accordingly depicted by 1,78; 5,02 and 1,78 USD dollars.

It is worth to mention that on the first stage methodological errors of strategic character were done in the process of transformation. Economic reforms were implemented isolated from each other. They did not have complex, coherent character and unified methodology [Chitanava N.,   1997.]. The emphasis was made on macroeconomic and financial stabilization, while the country on the initial stage did have neither macroeconomic nor financial resources, and therefore, it was impossible to carry out real reforms [Meskhia I., Murjikneli M. 1996.].

Despite this, from the viewpoint of transition of economic development to a new economic order, a number of measures were fulfilled: liberalization of prices happened, own money credit and tax system was created, reform of agricultural lands and housing sector was fulfilled, the first stage of small privatization was implemented and so on.

Stabilization and start of economic rise. The second part of 1994 and 1995 year belong to this period. After the economic recession, which was accompanied by hyperinflation, high unemployment and extremely difficult political, social and criminal problems, a new policy is started in the field of implementation of reforms on the basis of developed and quantitatively newly considered programs by the economists of Georgia, as well as by international organizations (primarily by the International Monetary Fund). As the result, coupon inflation curb happened, the conditions for enter of national currency- GEL were prepared. After GEL enter, inflation was reduced more and a stable exchange rate between national currency and the US dollar was established. Consequently, firstly during the reforms, the drop was stopped and the economic rise was started during 1995 GDP rise by 2,6%.

Accelerated economic rise. This period involves 1996-1997 years. Conducting of right policy of transformation in to a market economy (essentially “shock therapy”)was followed by establishment of economic stabilization, stop of economic fall, formation of growth tendency and then rapid growth of the economy. In 1996-1997 years, Gross Domestic Product risen on average by 11% in the conditions of hard national currency and low rates of inflation. On this stage of development the legislative basis of transition to market economy improved greatly and filled up, privatization of small and middle enterprises generally terminated, transformation of land property was implemented, attraction of foreign investments was strengthened; monetary credit system was improved, GEL exchange rate was released and its regulation was relied on market economy, investment conditions were improved etc.

Slowdown of the rates of economic rise and worsening of social conditions. Acquiring of the function of transit country by Georgia. It started from 1998 and continued till 2004. During this period the rates of economic rise, except 2003 year, is low ( average 3-4%) and social conditions exacerbated ( because of budget crisis salaries and premiums are not issued, there is an energetic crisis), exchange rate fall, the rates of inflation are being risen. On this stage general reason of development of negative processes was hampering of economic reforms that, of course, were conditioned by non-effectiveness of regulating functions of the state. The difficulties existing gin economic and social sphere were followed by political tension, as the result Rose revolution happened.

An important even for this period is that Georgia became oil transit country. On December 10, 1998 from Sangachal terminal in Baku “Western Route” pipeline was loaded by the first oil and with it Azerbaijan International Oil Consortium launched early Caspian oil transportation with Baku- Supsa direction. During the first week of 1999 oil entered Georgia.

Improvement of social conditions and acceleration of the rates of economic rise. Strengthen of the function of transit country by Georgia. The stage starts after the Rose revolution and continues till the war between Russia and Georgia (from 2004 up to August8,2008). During this period GDP average annual growth rate comprised 9-10 per cent. Real GDP fully risen by 42, 6 per cent, elimination of the budget and the financial crisis ( of the state budget deficit, pension and wage arrears have been paid, and so on); the energy crisis was offset ( the entire population and the economy, electricity and gas were smoothly supplied); the average annual salary in the economy grew 3 times and more, infrastructure of the country improved (the most part of the civil and highways were repaired, new roads were constructed and the macroeconomic environment became more stable, business conditions were improved (tax code was simplified and liberalized with simplification of license and permissions issue and other)), deepened privatization process, bank sector strengthened more etc. The important fact for this period is that the status of transit country of Georgia oil export extracted from ore of “Hazard-Chirag-Guneshli”. It is first direct route of oil transportation between Caspian and Mediterranean Seas.  Its construction cost 4 billion USD dollars. It is the longest pipeline in the world (totally 1768 km, from that on Azerbaijan- 443, Georgia- 249 and Turkey- 1076 km).

It is especially noteworthy that Georgia became transit country not only of the oil, but natural gas as well. Shah Deniz gas pipeline (the South Caucasus, or the Baku-Tbilisi-Erzerum gas pipeline) passes though Shad Deniz gas field in Azerbaijan sector though Georgia to Turkey. First test gas pipeline was loaded in Sangachal terminal on May 21, 2006. The gas first launch was scheduled for September 30, 2006, but for technical reasons the pipeline was punt into operation on December 20, 2006. With the aim of reduction of negative influence on the nature, pipeline was constructed in the same corridor where several years earlier “Baku-Tbilisi-Ceyhan pipeline” had been passed. The length of the pipeline is 692 km and annual passability is 16 billion cubic meters.

This period is characterized by some serious shortcomings: encroachment on the principle of the inviolability of property, non-economic intervention in the economy, actual abolition of anti-monopoly legislation, the rise of difference between export and import etc.

Delay of rates of economic growth and economic downturn.  This period coincides with the Russian-Georgian war and the start of world financial crisis. The war did 1 billion $ damage to the country. As the result of reduction of internal and foreign investments, the rates of economic growth were reduced in 2008 (comprised only 1,9%) and in 2009 it became the negative magnitude (3,9%). At the same period downturn of GEL rate started, arisen bank failures were followed by cut of credits and, consequently, investments, the construction business almost went bankrupt, ecological situation of the country worsened, the resort sector suffered significant losses etc.

Despite this, the economy of Georgia was able to withstand these two great negative impacts and the negative results did not increase into a large-scale economic crisis, where the international help played a great role.

Overcoming the economic recession and recovery of the growth tendency. It started in 2010 and has been continuing till today. Despite the difficulties existing in the previous period, in 2010 not only recession was overcome, but there was also a rise (6,4%).The sign of acceleration of growth rates is the rate of 2011. During already passed quarter Gross Domestic Product was risen by 5,5%.

Important rise of social assistance of the population, reduction of growth rates, downturn of GEL rate. It involves the period from 2012 up today. This period is characterized by important strengthening of social orientation of economy that is a heavy burden on the economy and causes the reduction of growth rates, but we suppose that it was a necessary measure as the population was in catastrophical conditions, particularly, in the context of healthcare. Slowdown of growth rates was also caused by the existence of political tension and expectation of new business regulations. Downturn of exchange rate was conditioned by the unity of internal and external factors, including, the existence of negative trade balance, net factor income reduction, strengthening of dollars rate in the world, incorrect adjustment and other.

Mistakes done on the way of transformation

As the analysis showed on the path of reform in Georgia successes and failures were superseded. I must say that with objective hampering conditions many errors were made that slowed the rate of implementation of reforms in Georgia and, accordingly, the process of transition to the market economy. Generally, these mistakes are following:

1. Incorrect internal and external policy carried out by the government at the initial stage. As the result of internal incorrect policy, the society was split into two parts (that has been continuing up today). As the result of incorrect external policy, we challenged big state of the world. Both mistakes lead the country to the civil strife, violation of the territorial integrity and extreme straining of the criminal situation. The economy appeared in hands of separate criminal groups.
2. Take inefficient actions of fight against guilty elements for a long time because of what the difficult criminogenic situation has been extended for years.
3. Non complexity and non systemacity of economic reforms.
4. Incorrect perception and implementation of liberal policy. The post-communist period is marked standing out almost ignoring state regulation of economy under the pretext of implementation of liberal policy, although, liberal policy was not implemented as until the last period business suffered strict non-economic interventions of the government. Initially racket revealed in all its stages and the end- mostly during the functioning. Indeed, if the liberal policy had been implemented, at least it would be necessary to conduct protectionist policy to some extent ( that all states addressed and address in case of necessity) to prevent the destruction of their national production that lead us to undevelopment of separate fields of economy and formation of imperfect market economy.
5. Choose of incorrect way of implementation of reforms. Transformation processes in Georgia started in so difficult form that it was necessary to implement shock therapy, but advanced preparation was necessary for it. From this aspect first and the most important mistake was Georgia’s stay in the monetary zone that, naturally, did not allow to conduct own monetary credit policy. However, Georgia choose the road with its monetary credit system transition to market economy – the road of “shock therapy”. Realization of the method of “shock therapy” requires targeted use of state monetary credit and budgetary institutions. In conditions of non-existence of such institutions complete use of “shock therapy” method is impossible and nay such attempt is doomed to failure.

So it happened. The shock therapy failed among 13 demands only 2 were performed [Papava V.2002].

1. After introduction of transitional currency- coupon, carrying out incorrect monetary credit policy (very unjustified monetary and budget emission, inappropriate use of foreign credits) resulting in a strong depreciation of coupon – hyperinflation.
2. After successful conduction of economic reforms in Georgia in 1995-1997 years, still incorrect conduction of reforms, inefficiency of regulating functions of the state. As the result, the level of corruption increased, business racket strengthened, financial, budgetary and energetic crisis was arisen, criminal situation aggravated and so on.
3. Inefficient use of important international assistance that is also a red strand running all transformative period.
4. Incomplete compliance of forms of economic regulations and methods with the requirements of the market economy.
5. Neglect of small business. Nowadays in Georgia the infrastructure supporting small business does not exist that interferes the formation of strong middle class.
6. During years neglecting of rural problems that lead rural economy, in fact, to destruction.
7.  War with Russia. We could not prevent the war with Russia that damaged Georgia very much. In addition to the loss of territories, it was followed by economic development retardation, reduction of investments, true economic damage.
8. Mistakes made during privatization
9. Informal appointment of age limitation non-officially for workers at public services. Dismissal of aged individuals was followed by an artificial increase in the number of unemployed in the country.
10. The principle of inviolability of private property (that represents cornerstone of market economy).
11. In fact, the abolition of antritrust legislation. As the result, the level of competitiveness decreased that is alarming for the development of market economy.
12. Increase of social tension between the separate classes of the society, as well as between the great part of the society and the government.
13. The growth of inequality of incomes. That also raises social tension.

Present shortcomings andgeneral directions of economic development in Georgia

Because of all this, during more than 25 years from the start of reforms, we could not transfer in to the perfect market economy. It should be specially mentioned that nowadays market infrastructure is undeveloped (commodity, stock and labor markets, insurance service, investing institutions, marketing, engineering, consulting and informative services and other); economic (industrial and agricultural production is undeveloped, level of development of small business is low, import exceeds export several times etc.) as well as social structures are non-progressive (strong middle class has not been created yet, the level of unemployment and poverty is quite high etc). In the future elimination of the deficiencies existing in the economy of Georgia and the choice of the right way cannot be done as the result of simple inertia. The main attention should be paid to economic development that is qualitative perfection of the economy, in order to eliminate deformation of the economy. This can be implemented with the help of new i.e. innovative economy’s construction, but, nowadays in this regard the situation is undesirable. In particular:

1. Poor condition of the country’s scientific potential: despite specific growth, scientists have low wages, are alarmingly decreasing their number, is outdates scientific material and technical base, in the world almost the lowest is share of scientific financing from state budget in Gross Domestic Product etc.
2.  System of high, professional training and continuing education requires serious transformation. It is not fully oriented on the requirement of knowledge and economy. Getting education did not become the guaranteed means of income growth in the future. System of staff training is undeveloped and ineffective etc.
3. System of service of scientific researches is underdeveloped (Rural species testing and counseling stations, seismic, model, quality management, intellectual property defense, scientific technical information, standardization and other services).
4. There is almost no research on the effects of the transfer system.  (Business Incubators, techno parks, consulting and technological transformation centers aetc.).
5. There are no mechanisms to facilitate the diffusion of technology- High-tech economic zones, etc.
6. Low level of development of small and middle business. There is no infrastructure to support small businesses and innovative small enterprises.
7. While the government recognizes the need to build an innovation economy, there is no clear innovation policy- appropriate strategy and regulatory mechanism; there is no corresponding comprehensive legislative basis and stimulating system of development of innovations, encouraging financial, tax and other mechanisms.
8. Especially neglected is regional innovative activity.
9. 9.      There is no further support by donor for project implementation, which diminishes donor activity till zero.
10. 10.  Undeveloped grant system and its management is low.
11. 11.  There is almost no connection between science, the state and business.
12. 12.  There are almost no orders from the state for scientific researches.
13. 13.  Practically are no carried out innovations based on their own researches. Import of innovations more or less is performed only in the sphere of Communications and Information Technology by the fact that there are many factors inhibiting the import of new technologies- lack of knowledge, political will and the lack of institutional support, scarce financial resources, political and social tensions etc.

Conclusions and recommendacions

For the formation of an innovation economy, first of all, it is necessary to abide market principles:

1. The exclusion of state non-economic interference in business.
2. Business conversion from dangerous area in to creative, more rapid advancement sphere of social stairs.
3. Wealth phenomenon transformation. Encouragement of legal wealth exploration and provision of investment.
4. Strengthening of market competition. Strict condition of antitrust laws in the life.
5. Abide of the principle of inviolability of private property ownership in conditions of full pluralization of ownership forms.
6. Strengthening state regulatory functions. It should ensure maximum protection of market principles; formation of healthy financial relationships; optimal taxes and social assistances; maximum effort to reveal for scientific development and its results to implement through realization of innovations and so on. The correct policy should ensure elimination of negative expression of paternalism, etatism, nepotism, corruption and others. It must implement the policy promoting national production, after which national product will become competitive in comparison with cheap, but low-quality import goods. In addition, the aim of this policy should be the creation of long-term perspective for economic development and not the achievement of self-provision according to all types of products.

Nowadays in economy of Georgia in addition to above mentioned general line, the following should be taken into consideration:

1. Institutional arrangement of the labor market to reduce unemployment rate. Nowadays labor market in Georgia is extremely random: there is no st ate service of employment and infrastructure that is connected with its functioning. In such conditions, sure, it is impossible not only the implementation of regulation, but even drawing of real picture of unemployment.
2. Priority should be given to economic policy that will move the economy not on Philips curve, but will cause the movement of Philips curve in such points where the unemployment level decreases and general level of prices is unchangeable or increases unimportantly. It is being achieved with stimulating such innovative programs (innovative policy aimed at reduction of unemployment), which provides the rise of approximate same rates of joint demands and joint supply. In other words, the growth rates of product volumes should precede and the wage go behind the rates of labor productivity until the real level of unemployment does not reach its natural level.
3. Foreign credits and use of assistance should be strictly controlled and should lead to acceleration of economic rise.
4. Nowadays in the country interest rate is high and bank credits have generally mortgage and consumer character that is why it is necessary to implement large projects in the sphere of material production by state and banks, credits will be used for creation of working places, economic rise, reduction of unemployment and poverty level.
5. An important attention should be paid to the development of small business that is the biggest reserve of reduction of unemployment and poverty level, strengthening of the middle class and, generally, for macroeconomic stabilization. For development of small business it is necessary to create its state supporting infrastructure.
6. For establishment of trade balance it is necessary to use own scientific technical potential and strengthen. Reforms in the sphere of science and education should be started taking into consideration today’s condition and overcome gradually deficiencies and achieve in such way world level. It is necessary in this sphere consideration of historical, cultural and other national features of the country. Firstly, we should save the scientific potential that yet exists in the country.
7. Innovative policy should be established in the country. Special attention should be paid to formation of innovative system mainly based on own researches and use of high technologies (high-tech) that cause radical changes in the economy, changes the tendencies of its development by both local and global scale.
8. Nowadays in Georgia the village is half natural ( 90% of farms in Georgia are natural), low-mechanized (main weapons still hoe, bar, ax and scythe are) and therefore low productive, with undeveloped infrastructure. Because of extremely serve conditions population of a village cannot overcome all difficulties and formation of developed agricultural production. Thus, effective assistance of the government to a village is obligatory. But, it should not weaken incentive of a farmer, but it s hould strengthen. Naturally, the main focus should be made on the fact that a farmer should increase production, install new technologies in order to transform as soon as possible in to modern farm commodity. Naturally, achievement of scuh condition abroad needs a decade, but we have a priority to use directly readily achievements that already exist in developed countries. It is easier for Georgia as it is a small country and the companies can purchase the farms and make investments. It should be taken into consideration that agricultural problems are often identified with the agriculture and talk about rural development often in such a way that do not take into consideration the level of the whole economy, especially the level of industrial development.
9. In the sphere of energy, firstly, main attention should be paid on digestion of rich hydro and non-traditional energy sources of the country. No way should we not say no to construction of power plants, naturally, on the basis of appropriate ecological justification. During solving these issues we should remember that we should make calculations not on short and long-term periods, but taking into account future perspective, as economy develops rapidly and fuel energy reserves are gradually running out in the world. Electricity shortage causes more ecological (if not mentioning economic problems) problems (deforestation, increase of unsanitary and other) rather than specific ecological concessions caused by construction of large hydro-electric plants. Naturally, it should also be taken into consideration painful requirements of preservation of national values.
10. Industrial development is the basis of development of all other fields. In the future orientation should be made on development of industrial predominantly scientific sectors, provision of rural economy and development of such traditional fields that are food industry and hydropower.
11.   It is true in conditions of globalization some functions of the state are limited, but it acquires more big, international functions that should be directed to neutralization of negative influence of globalization, effective use of assistance, raising of competitiveness, storage of best national traditions and their further improvement.

 REFERENCES 

1. Abesadze R., Arevadze N.  2011. Economy of Georgia in 90’s of XX century. Collection of scientific works of Paata Gugushvili Institute of Economic. volume 4.
2. Abesadze R. 2009. Economy of Georgia in XX-XXI centuries. Journal: “Ekonomisti”, N 1.
3. Meskhia I., Murjikneli M. 1996. Economic reform in Georgia, Tbilisi, “TSU Publishing House”.
4. Papava V.  2002. Political economy of post-communist capitalism and economy of Georgia, Tbilisi, “PDP”.
5. Chitanava N.,   1997. Social economic problems of transformative period. Tbilisi.

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