CC BY
19
Avtandil SILAGADZE
D.Sc. (Econ.), Professor, Academician at the National Academy of Sciences of Georgia
(Tbilisi, Georgia).
Mikhail TOKMAZISHVILI
D.Sc. (Econ.), Professor at Andrew the First-Called Georgian University
(Tbilisi, Georgia).
Tamar ATANELISHVILI
Ph.D. (Econ.), Associate Professor at Ivane Javakhishvili Tbilisi State University
(Tbilisi, Georgia).
GENESIS OF POST-COMMUNIST ECONOMIC DEVELOPMENT: OBSTACLES AND PROSPECTS (A GEORGIAN CASE-STUDY)
Abstract
The authors contend that the post-Sovi--et economy is developing slowly. Development of production based on the innovative use of national resources is a priority for stable development of the post-Soviet economies. National production in small post-Soviet countries such as Georgia must meet internal demands, for which the latter has the necessary potential. It has untapped mining and related industry assets, rich en-
ergy resources, and supplies of underground drinking water that the world needs, which can be transported via potential international pipelines, such as Georgia-Europe. The article concludes that powerful agricultural enterprises, insurance mechanisms, an efficient system for servicing agriculture, and technical service, storage, packaging, and distribution centers must be established.
KEYWORDS: Post-communist economy, economy of Georgia, national resources, industry.
Introduction
Despite the recent economic crisis, the world economy continues to grow. In the past thirty years, it has increased 6.6-fold, and between 1990-2011, this growth amounted to 158%. Despite the fact that the gross world product significantly decreased in 2008-2009 as a result of the global economic crisis (see Fig. 1), in 2012 world GDP nevertheless topped $70.0 trillion.
The economies of the former Soviet republics, now independent states, have developed at different rates. At the initial stage of their development, the emphasis was on building independent democratic states with a market economy.1 It has been a contradictory and difficult process. InconFigure 1
World GDP, $T
80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0
0
o> o> o> o>
GDP of the Post-Soviet Countries, $T
3,000 2,500 2,000 1,500 1,000 500 0
S o u r c e: World Bank, available at [http://databank.worldbank.org/data/home.aspx].
1 See: T. Basilia, A. Silagadze, T. Chikvaidze, Post-Socialist Transformation: The Georgian Economy at the Turn of the 21st Century, Tbilisi, 2001, pp. 16-17 (in Georgian); V. Papava, Economic Reforms in Post-Communist Georgia: Twenty Years After, Nova Science Publishers, New York, 2013, pp. 1-3.
THE CAUCASUS & GLOBALIZATION
sistent and nonsystemic implementation of the reforms in all countries, including Georgia, led to errors, particularly at the initial stage of the economic reforms. This trend was characteristic of all the post-Soviet countries.2 Other questions also arose, such as: How will the post-Soviet countries resolve the difficult socioeconomic problems and ensure sustainable economic development? What are the priorities of economic development?
The Development Dynamics of the Post-Soviet Economies
Following the downward trend in growth rates, the world economy was able to quickly recover and overcome the negative results of the slump. However, opposite trends were identified in the postSoviet states.3 When they first achieved their independence, they tried to reach the economic level of 1990. In so doing, the share of the post-Soviet states (apart from Estonia) in the world gross product amounted to 3.2% in 1990 and 3.7% in 2011. During the reforms, their ranking in the world economy essentially did not change.
Among the post-Soviet states, the lowest GDP index compared to 1990 was recorded in Georgia (-32.4%, 1994) and Tajikistan (-32.7%, 2000). Moldova and Georgia were the last to reach the GDP level of 1990, in 2007 and 2006, respectively (see Fig. 2). The growth dynamics show that small countries that do not have rich oil and gas resources develop at a slower rate than other countries.
Compared to 1990, the highest GDP growth was recorded in the oil- and gas-producing countries in 2011: Turkmenistan (868.7%), Azerbaijan (715.5%), and Kazakhstan (698.3%). Despite the fact that during the transition period, the Baltic countries were successful in carrying out their reforms, the increase in GDP in Estonia, Lithuania, and Latvia was relatively low and amounted to 586.0%, 406.6%, and 379.2%, respectively. The GDP increase in Russia and Armenia reached 453.5% and 359.5%, respectively, and the lowest increase was registered in Georgia (185.7%) and Moldova (195.0%).
On the whole, the post-Soviet economy grew 3.6-fold (apart from Estonia) in 1990-2011 and 4.9-fold in 1995-2011. So the economic growth rates at the end of the transition period were very slow, although after the post-Soviet countries adjusted to the market economy, they began rapidly rising.
According to World Bank data, the highest rates of GDP reduction (compared to the previous year) were registered in Georgia (-44.9%, 1994), Armenia (-41.8%, 1992), Latvia (-32.1%, 1992), and Moldova (-30.9%, 1994). During the past world financial crises, it amounted to -11.4% (1997) in Turkmenistan, -6.5% (1998) in Russia, -18.0% (2009) in Latvia, -14.7% (2009) in Lithuania, -14.1% (2009) in Estonia, and -14.1% (2009) in Armenia.
At the same time, despite the moderate growth rates, the Baltic countries enjoyed the highest GDP per capital. This was because they were not part of the Soviet system for long and, consequently, when the Soviet Union collapsed, the economy of these countries proved more developed than in
2 See: T. Basilia, A. Silagadze, T. Chikvaidze, op. cit, p. 132; V. Papava, op. cit., pp. 7-10; idem, Necroeconomics. The Political Economy of Post-Communist Capitalism (Lessons from Georgia), Universe, New York, 2005, pp. 129-132; Ia. Meskhia, "The Global Economic Crisis and Georgia's Macroeconomic Stabilization," in: Economisti (Tbilisi), 2009, pp. 8-19 (in Georgian); A. Silagadze, General Aspects of the Development of the Post-Soviet Economy—Urgent Problems of the Economies of the Post-Communist Countries at the Current Stage, Tbilisi State University, Paata Gugushvili Institute of Economics, Tbilisi, 2013, pp. 66-67 (in Georgian).
3 See: T. Beridze, E. Ismailov, V. Papava, Tsentralnyy Kavkaz i ekonomika Gruzii, Nurlan, Baku, 2004, pp. 47-48; A. Silagadze, Economic Perspectives in Post-Soviet Georgia. Actual Economic Problems under Globalization, Paata Gugushvili Institute of Economics, Tbilisi, 2011, pp. 89-91; A. Silagadze, General Aspects of the Development of the PostSoviet Economy—Urgent Problems of the Economies of the Post-Communist Countries at the Current Stage, pp. 66-69.
Figure 2
GDP Dynamics in 1990-2011 (1990=100%)
1,000 900 800 700 600 500 400 300 200 100 0
* Compared to 1995.
S o u r c e: World Bank.
other republics. In 2011, they produced more than $12,000 GDP per capita, ranking high on the list of other former Soviet republics. Russia also enjoyed one of the highest per capita GDPs in 1990. Despite their high level of natural resources, other oil-producing republics did not prosper, and their GDP amounted to only $5,000-11,000 per capita in 2011.4 GDP in the rest of the republics remained lower than average.
Today the economies of the post-Soviet states are more or less integrated into the global economy, and the negative phenomena going on in the world also have an effect on them. In 2008, before the world financial crisis, only a few post-communist states (mainly the Baltic countries) enjoyed a growing level of prosperity.5 During the crisis, in 2009, GDP decreased in most post-Soviet countries.6 The level of production fell, particularly in the Baltic countries (Latvia, Lithuania, and Estonia), Ukraine, and Armenia, where reduction in economic growth was registered in double digits. The situation improved somewhat in 2010.
On the whole, the overall small share the post-Soviet countries have in the world economy and their relatively low macroeconomic indices make it obvious that, despite their integration into the world market economy, they cannot make an economic breakthrough and their economies have not
4 See: World Bank, available at [http://databank.worldbank.org/data/home.aspx].
5 See: A.Tvalchrelidze, A. Silagadze, G. Keshelashvili, D. Gegia, Georgia's Social & Economic Development Program, Nekeri, Tbilisi, 2011, available at [http://www.ifsdeurope.com/prezetation.html].
6 See: A. Silagadze, "The Prospects for Georgia's Economic Development," in: The Economy and Business Processes, Tbilisi, 2011, pp. 19-22 (in Georgian).
THE CAUCASUS & GLOBALIZATION
benefited from any significant growth in the last twenty years. The same applies to the oil- and gas-producing post-Soviet countries.
Everyone knows that economic growth depends on the use of extensive and intensive factors. If resources are overly exploited, economic growth will not enjoy long-term stability. This may be the reason for the low economic growth in the post-communist countries. Consequently, these states and the structural changes in their economies are developing very slowly, if at all.
The post-communist countries are known for their abundant natural resources. In addition to states with large supplies of oil and gas, other countries are rich in agricultural produce, mining industry production, fertilizers, gold, cotton, metals, and other resources, which constitute their main export commodities. And this means that they are only a raw material appendage for the other countries of the world, since the end product is processed and manufactured in the raw material importer countries. This is why the raw material exporter countries are developing at a slower rate. Abundant natural resources do not mean rapid economic growth,7 and in many cases, they have a negative impact on economic growth.8 The literature calls this a "resource curse."9
The absence of human capital and investment resources also has an effect on economic growth. The shortage of new technology makes economic growth dependent on other, more developed countries. These states do not have a balanced economy and, according to the theory of unbalanced growth, economic development is restrained by shortages in resources of human capital and investments, as a result of which many branches of the economy are experiencing uncoordinated development. So government investments and long-term prospective plans and programs are vital for supporting strategic branches.
The reforms in the post-communist states were based on the concept of the Washington consensus. This concept considers the establishment of a liberal market to be an economic prerequisite for enhancing growth and generating market forces and espouses that it should stimulate the intensive use of all production factors. However, market stimuli in the states in question proved insufficient to promote the efficient use of resources. Why then are they faced with economic vacillation and can the insufficient use of natural resources and the absence of production capacities be considered the reason for the macroeconomic instability?
We will conduct a case-study of Georgia in order to shed light on this question.
Economic Trends in Post-Soviet Georgia
During the world financial crisis, the socioeconomic situation in Georgia, as in other countries, significantly deteriorated. The economic growth rates and foreign trade indices dramatically dropped, while inflation, external debts, the unemployment level, as well as the number of people living below the poverty line increased. For example, according to Georgia's Socioeconomic Development Program for 2011-2030,10 if it makes efficient use of natural resources, the country will be able to reach an average European economic level in the next 20 years without a significant increase in external debts.
Georgia is a moderately developed country. It has a population of 4.4 million people and its per capita GDP is $3,519. During the past ten years, the GDP growth rates reached a peak of 12.3% in 2007, although, as in other states, the economy slumped as a result of the world financial crisis and
7 See: A. Silagadze, "The Development of Georgia's Agriculture—The World Economic Crisis and Georgia," Social Economy, No. 1, 2010, pp. 69-71 (in Georgian).
8 See: D. Benbudi, S. Mamipour, A. Karami, "Natural Resource Abundance, Human Capital and Economic Growth in the Petroleum Exporting Countries," Journal of Economic Development, No. 35 (3), 2010, pp. 81-122, available at [http:// www.jed.or.kr/full-text/35-3/4.pdf].
9 J.D. Sackhs, A.M. Warner, "Natural Resources Abundance and Economic Growth," Natural Bureau of Economic Research, Working Paper 5398, 1995, available at [http://www.nber.org/papers/w5398.pdf].
10 See: A.Tvalchrelidze, A. Silagadze, G. Keshelashvili, D. Gegia, op. cit.
military conflict with Russia in 2008. In 2009, GDP dropped by 3.8%, although this drop might have been worse had it not been for the financial support of international financial organizations, the U.S., and the European Union. For example, the EU provided the country with $4.5 billion in financial support over the span of three years.
In 2012, Georgia's economic growth rates amounted to 6.1%, although in 2013, economic activity sharply fell. Purchasing power dropped, and whereas in previous years foreign direct investments ensured an increase in purchasing power and the high inflation rate, in 2012 inflation was replaced with deflation. The unemployment level was quite high and for many years remained at 13-16%. Foreign direct investments reached their peak in 2007 and amounted to 19.8% of GDP, although in 2012 they abruptly dropped to 5.4%. This sharp fluctuation indicates economic instability. Georgia's state budget amounted to 27% of GDP. Whereas in 2006, the gross external debt constituted 49% of GDP, in 2012 it reached 84%, 36% of which was state debt.
In Georgia's economy, 17.2% of GDP is produced in industry, 16.6% in commerce, 8.4% in agriculture, 10.6% in the transport and communication sector, and 11.2% in state management (see Fig. 3).
Figure 3
Dynamics of the Economy (2003 = 100)
— Agriculture Industry Construction Commerce
— Transport and communication
— State management
S o u r c e: National Statistics Board of Georgia, available at [http://geostat.ge].
Functioning of the real sector is largely supported by imports and not by the use of national resources. Moreover, products manufactured in the real sector cannot meet even the country's domestic demand. Low economic efficiency was particularly manifested in agriculture. Rationally organized agriculture can play a significant role in society's prosperity; however, agriculture and the food industry have never been competitive in post-Soviet Georgia. The country was not ready for the global increase in food prices at the beginning of this century and was unable to take advantage of the favorable opportunities for growing agricultural (including environmentally pure) produce.11 The government's inability to attract investments into this sector led to an increase in the import of agricultural production. During the world financial crisis in 2009, the volume of agricultural production dropped by 6% compared to the previous year. The total share of the agricultural industry in the country's GDP in 2012 dropped by 3.3 percentage points compared to similar indices for 2006 (see Fig. 4).
Figure 4
Share of the Agricultural Industry in Georgia's GDP (%)
The production of the main types of agricultural produce per capita dropped to a critical level— only half of the arable land was under cultivation.12 In 2011 (compared to 2003), the number of swine, cattle, and sheep and goats dropped by 77.8%, 12.5%, and 12.7%, respectively. The same year, compared to 2006, the import of meat, potatoes, and vegetables increased 2.2-, 2.1-fold, and 45.2%, respectively. As a result, national production does not meet most of the demand for agricultural produce, while the food industry meets only 1/6 of the demand.
In 2004-2012, the government ignored the possibility of priority development of national agriculture. In our opinion, government support is of vital importance in agriculture, particularly in those countries where the open market economy is at the formation stage. Importing products that the
11 See: A.Tvalchrelidze, A. Silagadze, G. Keshelashvili, D. Gegia, op. cit.
12 See: Ibidem.
country has favorable natural conditions for manufacturing has a negative effect on the industry's potential development. Georgia is a graphic example of this.
The country's economic policy has undergone significant changes in recent years. In correspondence with the program of the Russian Dream coalition, which won the parliamentary elections in 2012, $1 billion was allotted to support agriculture and the export of Georgian products to Western markets. Export of Georgian products to the Russian market was also included on the agenda. All of these measures were prompted by the crisis in the agricultural sector.
In recent years, industry and the construction sector in particular have been in a pretty bad way in Georgia. In 2006-2012, the volume of industrial production rose two-fold and more, while investments in basic assets increased by 95 percent (at current prices). National industry does not produce enough to meet domestic demand, which has led to an increase in import. It is obvious that the low competitiveness of industry will increase the share of imports.
Economic instability was also characteristic of the foreign trade sector (see Fig. 5).
Figure 5
External Trade in 2006-2012 ($m)
In 2012, the country's foreign trade balance amounted to $5,465 million (compared to $2,738 million in 2006), which is higher than the state's annual budget revenue. Petroleum products constitute one of the largest export items, but without the import of primary materials, which Georgia cannot produce itself, the country's potential export opportunities would be even worse. Nevertheless, national production cannot compensate for the negative balance due to the relative increase in imports. It is obvious that national production opportunities remain untapped.
Investments also have an impact on economic instability—the Georgian economy suffers from a shortage of internal investment resources, while the deficit is compensated for by attracting foreign capital. In this respect, before the world financial crisis of 2007, foreign direct investments increased, but later the situation significantly worsened. For example, in 2007, foreign direct investments
Figure 6
FDI into Georgia in 2004-2012 ($m)
amounted to $2,014.8 million, in 2008 $1,564.0 million, in 2009 $658.4 million, in 2010 $814.5 million, in 2011 $1,117.2 million, and in 2012 $865.2 million (see Fig. 6).
Figure 7
Georgia's External Debt in 2006-2012 ($bn)
16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0
2006
2007
2008
2009
2010
2011
National debt
Debt of the government and National Bank
S o u r c e: [http://www.nbg.gov.ge].
2012
THE CAUCASUS & GLOBALIZATION
There were several reasons for the decrease in foreign investments, including instability of the domestic political situation, inability of the government to protect private property, the world financial crisis, the Russian-Georgian war (August 2008), the low level of capitalization of the national economy, the growing inflation, etc.
Inefficient functioning of the Georgian economy led to galloping inflation. In 2006-2008, inflation fluctuated between 9.2% and 10%, while in 2010-2012, it oscillated between 7.1% and 8.5%. Due to the drop in aggregate demand, these fluctuations resulted in an inflation rate of 0.9%, which in fact indicated a drop in economic activity. So inflation was one of the results of the economic fluctuations.
The state budget was also unstable. In 2006-2012 (apart from 2009), state budget revenue increased by 2.2-fold. Nevertheless, it should be noted that the share of the local budgets in the state budget was very small, which points to the weak development of the regional economy. In the meantime, the external debt growth rates were much higher than the economic growth rates. In 2006-2012, Georgia's gross external debt increased by almost 3.5-fold, including the debts of the government and National Bank, which increased 2.8-fold (see Fig. 7).
Despite the billions in foreign aid Georgia received in the postwar period, which should have played a significant role in the country's economic revival, these funds have already been used up and Georgia can only count on boosting its economic growth today by developing national production.
Conclusion
In terms of economic growth, Georgia ranks as one of the lowest among the post-Soviet countries compared to 1990. Its abundant natural resources do not ensure it prosperity. The development of production based on the innovative use of national resources is a priority for stable development of the post-Soviet economies. The national economy can only revive by developing the strategic branches of agriculture and industry.
Competitive national output in the post-Soviet countries, including Georgia, should primarily meet domestic demand. Georgia enjoys the comparative advantage of untapped mining industry assets, rich energy resources (including renewable sources of energy), and underground drinking water reserves.13 Unfortunately, politicians are not currently considering this.
In order to improve the efficiency of agricultural production and the level of capitalization, powerful agricultural enterprises, insurance mechanisms, an efficient system for servicing agriculture, storage, packaging, and distribution centers, as well as technical servicing centers must be created. Georgia can supply the international market with environmentally pure products (meat and diary produce, vegetables, fruit, juices, and so on). Various monopolies in the economy must be eliminated and anti-monopoly services activated, enterprises must be ultimately freed from state pressure, property rights must be unconditionally protected, and so on. Only after these and other similar measures have been adopted will post-communist Georgia be able to reach an average European economic level in the next twenty years.
13 See: A. Tvalchrelidze, A. Silagadze, "Georgia's Fresh Mineral Water for Europe," The Caucasus & Globalization, Vol. 5, Issue 3-4, 2011, pp. 43-54.
