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Ekaterine MEKANTSISHVILI
Assistant professor, Department of Economics and Business, Tbilisi State University (Tbilisi, Georgia).
MACROECONOMIC ANALYSIS OF GEORGIA’S ECONOMIC DEVELOPMENT USING A SOCIAL ACCOUNTING MATRIX (1999-2008)
Abstract
This article presents a macroeconomic analysis of the Georgian economy (from 1999 to 2008) using a Social Accounting Matrix (SAM) based on the coun-
try’s system of national accounts. It examines the structure of the economic system, the mistakes made in the reform process and ways to correct them.
I n t r o d u c t i o n
The functioning of the economic system is a complex integrated process, and improvements in one area can lead to negative changes in other areas and pose a threat to the security of the economic system as a whole. In order to formulate an optimal development strategy, we need an in-depth analysis of the whole structure of the economic system, with a detailed study of macroeconomic dynamics for prediction purposes.
Social Accounting Matrix as a Tool of Macroeconomic Analysis
Macroeconomic analysis assumes the existence of a model that reflects the relationships between production, distribution, consumption and accumulation, between expenditure, income and final consumption, between saving and investment, etc. Let us consider a Social Accounting Matrix (SAM) based on the system of national accounts. There is a great deal of literature on this topic (G. Pyatt, J. Round, E. Thorbecke)1 which makes it possible to present a comprehensive picture (on both a national and regional scale) of the flow of products and their financial equivalents based on balance sheet indicators that quantitatively reflect various economic transactions taking place within the economy.2
1 See: W. Isard, I.J. Azis, M.P. Drennan, R.E. Miller, S. Sazman, E.Thorbecke, Methods of Interregional and Regional Analisis, Ashgate Publishing Company, Brookfield, VT., 1998.
2 See: Statistical Yearbook of Georgia, Tbilisi, Department of Statistics under Ministry of Economic Development of Georgia, 2004; 2008, pp. 140-159, 128-143.
THE CAUCASUS & GLOBALIZATION
Based on a SAM, it is possible to study the performance of the economy at various stages of reproduction. Moreover, in analyzing macroeconomic dynamics based on a comparison of absolute and relative (percentage) values of the matrix one can draw certain conclusions that may be used to develop national economic policy.3
In a SAM, each row/column pair indicates a certain economic action (an object of economic circulation). Input flows (incomings) are shown in rows (receipts, resources, income, liabilities and credit transactions), while output flows (outgoings) are shown in columns (use of funds, use of resources, expenditure, assets and debit transactions). The intersections of rows and columns form boxes called cells, with entries in these cells reflecting the linkages between accounts. As a result, each cell has a certain economic content and, when filled with statistical information, a quantitative content as well.
A matrix designed to determine the economic structure and the interactions within it is based on three key economic processes: production, consumption and accumulation, and also economic relations with other countries, which reflect various aspects of economic circulation:
■ Production—balance of goods and services;
■ Consumption—balance of gross domestic product (GDP);
■ Accumulation—balance of capital expenditure and its financing;
■ External relations—balance of payments.
Macroeconomic Analysis of the Georgian Economy (1999-2008)
Based on the Georgian system of national accounts, the general pattern of flows in the economy can be presented in the form of a SAM (see Table 1).
As can be seen from Table 1, the sequence of accounts begins with the production account. The result of production is the output of goods and services. The difference between output and intermediate consumption is called value added, which is the sum of primary incomes received from production.
Income accounts are central to the matrix, since they connect the result of production with the process of capital formation and changes in financial assets and liabilities.
Income accounts are divided into three groups, i.e., into three main stages of the circular flow of income: generation, distribution and redistribution, and also the use of income for consumption and saving.
The purpose of the first group of income accounts is to reflect all incomes related to production. Gross value added is the sum of incomes received by domestic factors of production plus taxes on production and products (government revenue). It is divided into three parts: compensation of employees (earned income), taxes on production, and other factor incomes as represented by profit and mixed income (household sector).
In the primary distribution of income account, factor income from property is shown as a separate item (interest, dividends, rent, undistributed profit, etc.).
The balance of primary incomes, derived as a balancing item and the main result of the activities covered by the first group of accounts, represents the sectoral distribution of gross value added in accordance with provided factors of production. A contribution to the balance of primary incomes is also made by the “Rest of the world.”
3 See: D.W. Marcouiller, D.F. Schreiner, D.K. Lewis, “Constructing a Social Accounting Matrix to Address Distributive Economics Impacts of Forest Management,” Regional Science Perspectives, Vol. 23, No. 2, 1993, pp. 60-90.
Table 1
Social Accounting Matrix
Production Consumption Accumulation Rest of the world X
Production Intermediate consumption Final consumption Gross capital formation Exports plus balance of goods and services
Consumption GDP minus consumption of fixed capital Balance of primary incomes and current transfers
Accumulation Consumption of fixed capital Net saving Capital transfers (net)
Rest of the world Imports Net lending or borrowing (including statistical discrepancy)
h 1
The secondary distribution of income account shows how various transfers change the balance of primary incomes, redistributing income in accordance with current government economic policy.
The group of income accounts ends with the use of income accounts. They show how households, government units and non-profit institutions serving households allocate their disposable income between consumption and saving. For other sectors, income equals saving. The balance between consumption and saving is a very important characteristic of the economy.
The capital account shows that for the economy as a whole saving equals investment, i.e., gross fixed capital formation and changes in inventories.
The financial account shows how net lending or net borrowing is affected by the acquisition or disposal of financial assets. There is no balancing item in this account. Net acquisition of financial assets should be equal to net incurrence of liabilities.
The entire chain of transactions that begins with production activity, which is reflected in the production account, is thus completed. As noted above, a social accounting matrix makes it possible to study the operation of the economy at various stages of reproduction and to perform a comparative analysis of absolute and relative (percentage) matrix values. The construction of a SAM involves the calculation of two kinds of absolute and relative matrix values:
■ The total of all indicators for each row of the matrix is taken as 100%, with calculation of the percentage of each indicator;
■ The total of all indicators for each column of the matrix is taken as 100%, with calculation of the percentage of each indicator.
Based on the above SAM, let us analyze Georgia’s macroeconomic performance for 1999-2008.
The first row/column pair is an income and expenditure account related to production (income is shown in the row, and expenditure in the column).
Figure 1
A comparative analysis of production for the first row (see Fig. 1) shows:
(1) Intermediate consumption (the resource part of the production process) in absolute terms is characterized by slow growth (judging from the shape of the curve), while in relative terms it remains almost the same, which points to the insufficient resource intensity of the technological process and lack of dynamics in the share of intermediate consumption within the structure of primary incomes.
(2) The growing dynamics of absolute final consumption values against the background of slight variations in relative values point to the domination of final consumption in the structure of primary incomes, which determines the dynamics of received income associated with the production process.
(3) The slight variations in the dynamics of relative gross capital formation values against the background of an insignificant increase in absolute values point to small amounts of fixed capital investment, which ensures the technological process of production.
(4) The similar dynamics of absolute and relative export values are explained by the fact that exports are the main source of budget revenue.
Figure 2
A comparative analysis of production for the first column (see Fig. 2) shows the following.
GDP and intermediate consumption, which characterize the production structure and technology, are growing in absolute terms against the background of slight variations in the dynamics of relative indicators. GDP is growing faster than intermediate consumption in absolute terms, which means that the country is more oriented to creating and servicing the final product than to producing capital goods and equipment.
The dynamics of absolute and relative values for imports coincide, which is evidence of steady demand for imported products. As a rule, these are consumer goods and some food products that are not produced in the country or are of low quality.
Figure 3
In the second row of the matrix, income related to the consumption process appears as disposable income. A comparative analysis of absolute and relative values shows that the basis for conFigure 4
sumption is provided by production-related income, while the share of profit from property is minimal.
A comparative analysis of consumption for the second column (see Fig. 4) shows the unstable dynamics of final consumption expenditure in relative terms, while in absolute terms it has steadily increased. This is due to an increase in the cost of the consumer basket and in the share of final consumption expenditure compared to net saving.
A comparative analysis of accumulation for the third row (see Fig. 5) shows that the part of GDP used for consumption of fixed capital and net saving is the main source of income related to accumulation. As to capital transfers, their share is minimal. At the same time, the relative values of consumption of fixed capital and net saving move in opposite directions (when the share of net saving increases, the share of consumption of fixed capital decreases).
Figure 5
A comparative analysis of accumulation for the third column (see Fig. 6) shows an increase in the absolute values of gross capital formation while relative values tend to decrease. The absolute
Figure 6
Figure 7
values of net lending are decreasing, and this points to the growing role of loans from other countries invested in fixed assets, which improves the dynamics of gross capital formation in absolute terms.
A comparative analysis of the “Rest of the World” for the fourth row and column (see Figs. 7 and 8) shows that the balance of payments is based on exports and imports.
Thus, macroeconomic analysis clearly shows the positive dynamics of some economic indicators for Georgia in absolute terms (GDP, final consumption, gross capital formation, intermediate consumption, etc.).
But current growth rates give no reason to believe that the Georgian economy has reached a high level. Economic growth means a quantitative increase in the size of the economy, while economic development is an improvement in its quality.
Development occurs in any economic system, but its nature and pace depend in large part on the structure of production and on the state of the economy in the initial period, while internationalization and globalization processes create new problems.
In the past few years, the Georgian authorities have been trying to implement economic reforms: the Tax Code has been amended (in 2007, the number of taxes was reduced to seven, including five state and two local); affordable trade regimes have been introduced (including a system of reduced tariffs on trade with WTO countries); a preferential trade regime has been established with the U.S., Canada, Switzerland and Japan; a radical approach to the privatization of state property is being
Figure 8
Fourth Column of the Matrix (Rest of the World)
8,000 -6,000 -
4.000 -
2.000 -0
-2,000 -
1999 ' 2000 ' 2001
2002 2003 2004 2005 2006 2007 2008
Exports plus balance of goods and services Balance of primary incomes and current transfers Capital transfers
(absolute values)
Exports plus balance of goods and services Balance of primary incomes and current transfers Capital transfers
(relative values)
implemented; the development of the banking sector has accelerated, and financial reporting operations and the foreign exchange regime have been liberalized (currency regulations apply equally to residents and non-residents).
But the results of the reforms are so far unsatisfactory (living standards remain low, unemployment is increasing, and companies go out of business).
With such indicators, it is no longer possible to conceal the existence of a crisis, although the government blames everything on the global financial crisis and does not admit its own mistakes in economic policy.
C o n c l u s i o n
As things stand today, a mixed system largely based on market processes and the regulatory functions of the state is believed to be the best economic system.
THE CAUCASUS & GLOBALIZATION
But the creation of a mixed economy in Georgia is delayed. This is evident, among other things, from the fact that decades of backwardness have resulted in the existence of uncompetitive enterprises and the accumulation of huge debts in the public sector.4
The situation is compounded by poorly developed market infrastructure and underestimation of the role and importance of human capital, which almost cancels out the performance of state enterprises.
The state’s regulatory activities are insufficiently effective; the consequences of the world economic crisis and the Russian-Georgian war (August 2008) have a negative impact as well. Experts agree that the reform process in Georgia has stalled and is very contradictory.
All of this can have grave consequences, because the market and market relations not only help to raise the level of the economy in a particular country, but can also destroy it and deepen the socioeconomic and political crisis still further unless the authorities are able to make proper use of its positive qualities and offset its negative aspects.5
In order to resolve these problems, it is necessary to accelerate economic reforms, which should be geared to strengthen the regulatory functions of the state, spur the development of market infrastructure, enhance the social orientation of the economy, and create a favorable business environment.
It is also necessary to make serious changes in fiscal policy, create conditions for foreign investment, improve the banking system and establish a securities market.
4 See: V. Papava, Nekroekonomika i postkommunisticheskaia transformatsia ekonomiki, Company Imperial, Tbilisi, 2001, pp. 32-33.
5 See: G. Tsereteli, “Gruzia na puti stanovlenia rynochno-ekonomicheskikh otnosheni,” Ekonomika, Nos. 8-9, 2007, pp. 15-20.
