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most promising production plants must be envisaged. Success will largely depend on the correct choice of corresponding institutional forms of organization and interaction between the production plants and mechanisms for stimulating the development of small and medium enterprises. We believe that employment growth and employment rationalization nationwide and in the Georgian regions can only be achieved by carrying out such comprehensive measures.
Iza NATELAURI
D.Sc. (Econ.), Associated Professor at Javakhishvili Tbilisi State University, Department Head at the Paata Gugushvili Institute of
Economics (Tbilisi, Georgia).
EMPLOYMENT PROBLEMS AND SHORT-TERM ECONOMIC BENEFITS IN POST-COMMUNIST COUNTRIES (GEORGIAN CASE STUDY)
Abstract
Based on a case study of Georgia, this article takes a look at a modified market model of full employment and analyzes the following:
(1) the microeconomic aspects of employment in present-day Georgia, which are
the formation of a labor market, a balance between labor supply and demand, the cost of labor, and a labor cost formation mechanism; and
(2) the short-term economic benefits related to employment.
I n t r o d u c t i o n
In Georgia, as in the other post-communist countries, the market model of full employment is a modification of the socialist model of full employment and the market model of full employment. It reflects the special traits of employment generated by the crisis state of the economy, as well as those inherited from the past. In particular:
(a) in the economy’s crisis state, measures that encourage widespread employment, protection of the unemployed, stimulation of labor demand, etc. are of top priority;
(b) of the traits inherited from the past, the post-communist countries have retained the state’s active role, the population’s mindset, and labor motivation. The benefits from these three elements are long-term;
THE CAUCASUS & GLOBALIZATION
(c) their impact on labor supply and demand in different areas is of vital importance: in order to raise labor demand, new jobs must be created, business enhanced (small enterprises established), remunerated occupations organized, jobs created for disabled people, and so on. As for labor supply, it can be increased by systematically raising the level of professional skills, developing self-employment, regulating migration processes, and so on.
Special Features of the Modified Market Model of Full Employment in Post-Communist Georgia
The models of classical full and market full employment differ from each other.1
The model of classical full employment functioned in the former socialist countries. At that time, there was no unemployment. The entire able-bodied population, with a few exceptions, was employed. Employment of the population was guaranteed by the state, which created jobs, distributed them among the working population and paid them a salary. Salaries were the main source of livelihood for the employed and the members of their families.
In contrast to the model of full employment, in which the state was the only employer and the labor of those employed was paid through a salary fund (a component of the national revenue) on the basis of so-called scientifically justified rates, the market model of full employment reflects the dependence between employers and the employed formed on the basis of a work contract. The employed are paid from their employers’ income in compliance with the quantity and quality of the work they perform taking into account the end results of their labor.
According to the market model of full employment, the balance between labor supply and demand is primarily accomplished through market mechanisms, whereby unemployment is also possible in addition to employment, and it is the state’s responsibility to maintain unemployment at a natural level, keeping in mind the active role of trade unions and the high level of professional and territorial mobility inside the country.
In post-communist countries, including in Georgia, the model of classical full employment was replaced by the modified market model of full employment.2 This modification is associated with the macroeconomic past of employment, the economic crisis of the post-Soviet period, and microeconomic present and future employment.
As for the macroeconomic past, the state as the monopoly property owner and only employer, the population’s mindset, and labor motivation were the three most important factors with long-term benefits. Their impact on the functioning of the labor market and employment was and remains significant today.
In view of the impact of the economic crisis on employment, the following must be noted: in post-communist Georgia, the economic crisis has been aggravated by reform of the sociopolitical system, as well as the breakdown in economic ties, inflation processes, and the aggravated social background. The old enterprises closed down, and new ones were not built. Most of the able-bodied
1 See: I. Natelauri, O modifitsirovannoi modeli effektivnoi zaniatosti v stranakh s perekhodnoi ekonomikoi, Collection of Papers from a Scientific Practical Conference of Economists of Georgia, The Gugushvili Institute of Economics Publishers, Tbilisi, 2008; Rynok truda i sotsialnaia politika v tsentralnoi i vostochnoi Evrope, ed. by N. Bar, ICC DIS, Moscow, 1997; G.E. Slezinger, Trud v usloviiakh rynochnoi ekonomiki, Institute of Labor, Russian Federation Ministry of Labor, Moscow, 1996.
2 See: I. Natelauri, Aktualnye problemy zaniatosti v Gruzii: postkommunisticheskiy period, The Gugushvili Institute of Economics Publishers, Tbilisi, 2009.
population found itself without a job. This took its toll on the market model of employment, created an imbalance in supply and demand, and changed the labor cost formation mechanism.
As for the microeconomic aspects of employment, they include the formation of a labor market, a balance between labor supply and demand, the cost of labor, and a labor cost formation mechanism.
In present-day Georgia, it can be unequivocally said that the labor market does not yet have a corresponding infrastructure, that it is in the process of spontaneous formation. The labor market is being formed against an aggravated social background and in the conditions of an economic crisis with all the ensuing consequences. In addition, the labor market is distinguished by an imbalance in labor supply and demand. At the initial stage of the economic crisis (in 1990-1994), when old enterprises ground to a halt en masse and no modernization was forthcoming, most of the employed found themselves redundant. There was surplus supply, the social background became aggravated, as well as artificial increase in the number of jobs; along with legal unemployment, so-called illegal unemployment appeared. Among the unemployed were engineers, physicists, doctors, and highly qualified specialists of other profiles. Due to the mindset that had become deeply entrenched in the public consciousness over several years, they could not imagine working as shopkeepers, nannies, chauffeurs, waiters, and so on, that is, occupying posts that did not require a higher education.
The surplus labor supply was the main reason for the extremely aggravated social background that developed. The government took active steps to overcome it. Measures were implemented in the country designed to stabilize the economy with the help of the IMF and WB.3
In 1994, the Georgian Parliament of the first convocation adopted a set of very important laws, including the law on entrepreneurs. Reform of the monetary system was carried out, foreign economic relations were activated, and there was demand for professional and territorial mobility, which grew even more as a result of the economic reform.
This yielded results. In 2003-2007, new jobs were created in the law-enforcement agencies, the education system, the government structures, and so on, which often demanded employees with new specialized skills. As a result, in certain regions and in certain fields of specialization, the demand for workforce was even higher than supply. This became obvious as people vied to fill the vacancies that appeared. Incidentally, this local imbalance whereby workforce demand exceeded supply in certain regions and in certain fields of specialization is not a new phenomenon for the country. For example, in the mountainous regions, the demand for teachers, doctors, and employees with other special skills of this type has almost always been higher than the supply, including in years when the employment level dramatically dropped.
Business enhancement, particularly encouraging the creation and functioning of small enterprises, organizing remunerated social work, and employing disabled people, is an important way to increase labor demand.
When generating supply, special attention should be given to ensuring the corresponding level of professional qualifications of those workers in demand. In Georgia, this became extremely problematic when many of the old enterprises ceased to function, and correspondingly many professions became superfluous and unnecessary. Many people were forced to change their profession, becoming accountants, chauffeurs, or shopkeepers. Teachers were in need of serious advanced professional training due to reform of the education system, as well as doctors, policemen, and people with other special skills. New professions also appeared—managers, market researchers, and others. Training specialists to meet the new demands of the market infrastructure will continue to be top priority task in the future.
It is generally recognized that self-employment, which only goes back fifteen years in Georgia, plays an important role in generating supply. The number of self-employed in the country is rising from year to year and is much higher than the number of workers for hire. The measures being imple-
3 See: V. Papava, Mezhdunarodnyi valiutnyi fond v Gruzii: dostizheniia i oshibki, Tbilisi, 2000.
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mented to encourage self-employment include issuing privileged loans, particularly in agriculture, and providing tax benefits.
The most important vector for present-day Georgia when generating labor supply is regulation of the internal and external migration processes. At the initial stage and during the subsequent periods of the economic crisis, many Georgian citizens went abroad in search of work. Many of them were illegally employed. The high index of external migration is another indication of the imbalance between labor supply and demand.
As for the cost of labor and the labor cost formation mechanism, in Georgia they are far from perfect. Salaries do not perform any of their functions: reproductive, social, or regulating. Current salaries are creating a discriminating environment in the labor market. Salaries do not even satisfy the physiological needs of citizens and their families, and there can be no talk of reproductive and stimulating functions. This situation indicates an economic crisis. The fact that salaries in the country do not perform the function of balancing labor supply and demand and they are defined by means of a contract between certain forces in the labor market also points to an economic crisis.4
Employment and Short-Term (Instantaneous) Economic Benefits
It is well known that there is a functional dependence between the production volume and production factors (labor and capital). When demand for a certain commodity rises, the natural reaction of manufacturers is to increase its production volume. The first thing they do is increase the number of employed, that is, they try to gain short-term benefits by raising production capacities as much as possible. Then production is expanded on the basis of existing enterprises by acquiring additional technology, production lines, and so on. The end results are achieved in the mid-term by increasing the amount of investments. If successful, widespread expansion of production continues, which implies both the opening of new enterprises and the reconstruction and modernization of old ones. In this event, the end results may be a long time in coming.
Ways to raise production volume by increasing the number of employed and maximizing production capacities in the short term differ from each other in different spheres of the economy, in different branches, and in enterprises and companies of different profiles:
(a) in the case of existing enterprises, providing there is stable economic development, burgeoning sales are guaranteed during an increase in demand. Encouraged by the burgeoning sales, the production volume is increased even more by stretching production capacities (for example, increasing the length of shifts). Enterprises have a real opportunity to obtain additional profits, mainly by means of internal resources and additional labor;
(b) in the case of existing enterprises, in the conditions of an economic crisis, when the unemployment level is higher than its natural level, thus generating surplus labor, an increase in production volume, given increased demand, should not present any problem. In reality, however, despite the fact there is demand and supply, the situation is rather serious—an economic balance cannot be achieved because the producers and consumers are unable to reach an agreement on cost.
4 See: I. Natelauri, Mikroekonomicheskie aspekty zaniatosti v Gruzii, Papers from an international scientific conference called The Problems of Efficient Functioning of Society and the State, Tbilisi, 2008; M. Toria, “Formirovanie rynka truda v perekhodnyi period,” Sotsialnaia ekonomika, No. 7, 2007; Labor Code of Georgia, Tbilisi, 2008.
In post-communist Georgia of the 1990s, many enterprises closed down.5 This was caused by the breakdown in old economic ties and the absence of new ones. It was impossible to supply enterprises with raw material or sell the commodities they produced. In Georgia, the products manufactured could not be sold because of their low quality and the cost formation mechanism in effect at that time.
The closedown of most enterprises led to an increase in unemployment. A surplus of unemployed labor appeared in the country. It was impossible to expand production to the desirable proportions. In order to shed more light on the matter, let us take a look at the situation in the medical service system.
It is obvious that the country has a surplus number of both highly qualified physicians and those in need of medical services, that is, in the medical service sphere there is both demand and supply. The problem lies only in the consumers and suppliers of these services reaching an agreement on the cost of the aforesaid.
There is a similar situation in tourism, particularly local, as well as in the resort industry, education, and other spheres.
The banking sector is the topic of a separate discussion. From the viewpoint of employment, it deserves particular attention. In the past few years, banks appeared, first, as the most attractive employers and, later, as organizations that made large numbers of young qualified specialists redundant.
In Georgia’s case, problems in the banking sector were created in the context of the hostilities in 2008. In particular:
(1) the population tried to withdraw their funds from their bank accounts;
(2) most of the amount withdrawn was not returned;
(3) inflation expectations became aggravated and not without reason—inflation expectations have made money a less attractive asset;
(4) in those regions inflicted by the hostilities, the property of legal and physical entities, banks included, was destroyed.
It has become practically impossible to return issued loans, which has created additional problems in the banking sector.
It stands to reason why banks are reluctant to issue loans. The personnel policy they are conducting is based on objective considerations and will not improve in the future.
As for the enterprises operating in Georgia, they should be divided into two groups: enterprises oriented toward the domestic market and enterprises oriented toward export. The enterprises oriented toward the domestic market have all the prerequisites for increasing production and obtaining shortterm benefits by means the larger workforce. The risk is also minimal in those enterprises that are oriented toward export, for the simple reason that
(1) they produce primarily raw products,
(2) the index of Georgian export in the foreign market is insignificant, and
(3) most importantly, Georgia enjoys immense international support.
From the viewpoint of achieving short-term benefits, agriculture and trade occupy a special place among the branches of the economy. In these branches, naturally, it is possible that the anticipated result will be achieved in less than a year. As for costs, they are mainly labor-generated and insignificant compared with other branches, even at the initial stage of activity.
In Georgia, agriculture is a field of traditional specialization in producing grains, vegetables, legumes, and so on. In addition to the fact it can produce vitally important products, this branch also enjoys reserves for increasing the level of employment in a short period of time.
Trade has drawn the attention of experts since as early as Soviet times, since the second half of the 1980s. At that time, the economic reform program known as perestroika envisaged cooperation
5 See: T. Beridze, E. Ismailov, V. Papava, Tsentralnyi Kavkaz i ekonomika Gruzii, Nurlan, Baku, 2004.
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-
