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THE CAUCASUS & GLOBALIZATION
Marina ACHELASHVILI
Ph.D. (Econ.), Research Associate at the Paata Gugushvili Institute of Economics of Georgia
(Tbilisi, Georgia).
ON THE INSTITUTIONAL INFRASTRUCTURE OF ECONOMIC GROWTH MANAGEMENT IN THE POST-COMMUNIST CAPITALIST COUNTRIES
Abstract
The purpose of managing economic growth in post-communist capitalist countries is not only to achieve higher growth rates, but also to raise the efficiency and quality of this process in the interests of society as a whole. This entails creating an institutional infrastructure that reduces transactional outlays and creates stimuli for sustainable economic development. The efficiency of economic growth ultimately depends on the economic institutions that function and on how effectively and appropriately they meet the development trends of the national economy, and also on the degree of democrati-
zation of society. This article defines the place of political and economic institutions in raising the efficiency of economic growth. It focuses attention on specific mechanisms of economic growth management that form the foundation of the institutional infrastructure. It also identifies the objective difficulties and unresolved problems of economic institutionalization in post-communist capitalist countries that are related in particular to the violation of property rights, institutional traps, the phenomena of the so-called necroeconomy and zombie economy, and the inability to fully realize comparative advantages.
I n t r o d u c t i o n
Economic growth management has been studied in sufficient depth. It boasts a wealth of theories and models. However, economic growth management continues to attract both scientific and
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practical interest. The problem is becoming more urgent due to the global recession that has inflicted the world economy recently.
In democratic societies, economic growth is associated both with a liberal economic system, in which free markets interact, and with competitive pressure on the innovation and investment behavior of the economic entities. However, economic prosperity is not achieved by democracy alone.1 The market economy is by and large a rather indefinite phenomenon, which is why it must be regulated in order to raise the efficiency of economic development. This is particularly important in the case of long-run economic growth, since the market mainly solves tactical tasks (it is the best way to distribute production resources at any particular moment in time), but has little to offer when choosing strategic vectors of national economic development.
Recently, long-run economic growth management has become increasingly related to institution-alism, which organizes and regulates economic development and helps to reduce transactional outlays and form stimuli that influence the innovation and investment processes.2 The institutional approach to economic growth management forms the foundation of contemporary endogenous models3 that look for internal mechanisms capable of generating additional economic growth. The efficiency of long-run economic growth ultimately depends on the economic institutions that function and how effectively and appropriately they meet the development trends of the national economy, and on the degree of democratization of society. In other words, the rates of economic growth and its quality are determined by how efficiently the economy is organized and how its development is managed.
Institutional ideas about how to maintain and manage economic growth are important today in the context of the marked economic slump, including in post-communist capitalist countries,4 which have borne the greatest brunt of the crisis.5 This article examines the formation of an institutional infrastructure of economic growth management.
The Methodological Foundation of an Institutional Infrastructure of Economic Growth Management
The studies carried out in recent years have been placing the main accent on a relative analysis of the differences in per capita income in different countries, whereby researchers resort to a large
1 Several major studies are devoted to this rather complex problem, among which the following work can be singled out in particular: D. Acemoglu, J.A. Robinson, Economic Origins of Dictatorship and Democracy, Cambridge University Press, New York, 2006.
2 The general problems of economic institutionalism and its development prospects in the context of post-communist transformation are examined, for example, in: O. Inshakov, D. Frolova, "Evoliutsionnaia perspektiva ekonomishesko-go institutsionalizma," Voprosy ekonomiki, No. 9, 2010, pp. 63-77.
3 Contemporary economic growth management models are based on an empirical analysis of the influence of various factors (institutional, political, resource, technological, international, etc.) using quantitative methods, in particular econometric, which make it possible to establish the vector and degree of the influence of each of the above-mentioned factors on economic growth. The main determinants of economic growth are defined on the basis of this analysis directly from the model, that is, economic growth is regarded as endogenous.
4 Post-communist capitalist countries imply those East European countries which, during more than two decades of market reforms, have not succeeded in coming up to the established European standards (see: V. Papava, T. Beridze, Ocherki politicheskoi ekonomii postkommunisticheskogo kapitalizma, Delo i Servis, Moscow, 2005; V. Papava, "Economic Transition to European or Post-Communist Capitalism?" European Association for Comparative Economic Studies (EACES) Working Papers, No. 1, March 2006, available at [http://www.eaces.net/news/WP-1-06.pdf]).
5 See: V. Papava, "Finansovyy krizis i postkommunisticheskiy kapitalizm," Mirovaia ekonomika i mezhdunarod-nye otnosheniia, No. 8, 2009, pp. 89-95.
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amount of empirical data to explain this phenomenon. Particular emphasis is being placed on the role of institutions and governance,6 which is described using such indicators as rule of law, level of corruption, bureaucratic competence, degree of democratization, civil freedoms, governance efficiency, political instability, government accountability, etc.
In present-day conditions, institutions and governance are interpreted as the most important determinants of long-run economic growth. It is thought that differences in institutional infrastructure are the fundamental reason for the differences in standard of living among countries.7 Experts are discussing which institutional conditions are necessary for economic growth, what role the government plays in its management, how economic growth should be maintained and accelerated, how institutions and governance influence long-run economic growth, and how specific mechanisms should be elaborated for managing it.8 An analysis of existing viewpoints confirms the relation between economic growth and the institutional infrastructure.9
The discussion about the role of the institutional infrastructure in economic growth management essentially boils down to the following.
Economic institutions make use of certain regulations to determine the economic stimuli and vectors of the management process, to influence the distribution of production resources and investments, and to organize production. The institutional infrastructure of economic growth management varies greatly from country to country. This is because the emergence of economic institutions is a matter of social choice.10 Different social strata gain benefits from different economic institutions and so a conflict of interests arises between social groups during the distribution of resources. Economic institutions form the distribution of resources and economic phenomena. Economic growth is the main result of the functioning of the national economy.
What is meant by a "good economic institution"? Is it an institution that generates economic growth? This definition of a "good economic institution" is criticized in several fundamental works on the theory of contemporary economic growth.11 The thing is that economic institutions are formed by the government in the interests of certain social groups. The government, in turn, is determined by political institutions and the distribution of resources in society. Political institutions de jure create the government, while the groups that have large resources de facto form the government. Political institutions, by nature, are exogenous determinants, since they are brought in from the outside and can change under the influence of external circumstances and conditions, social conflicts, culture, ideology, and so on. Economic institutions, on the contrary, are endogenous determinants that are specified by society or a segment of it, that is, they are the result of social collective choice.12
Political institutions are the basis for creating "good economic institutions." The distribution of political preferences is important for economic institutions, while the distribution of economic preferences contributes to economic growth. Whereby property rights, an institutional component, play the most important role. "Good economic institutions" are based on wide-scale property rights, since they stimulate macroeconomic stability, economic activity, the effective distribution of resources, innovation and investment processes, and industrialization, which is particularly important in the fi-
6 See, for example: J. Pierre, B.G. Peters, Governance, Politics and the State, Macmillan Press LTD, Houndmills,
2000.
7 See: A. Rassanini, S. Searpetta, P. Hemmings, "Economic Growth: The Role of Policies and Institutions," Panel Data Evidence from OECD Countries, OECD Economics Department Working Paper, No. 283, 2001, SSRN, available at [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=265091 http://www.oecd.org/eco/eco/].
8 See: D. Acemoglu, S. Jonson S., J. Robinson, "Institutions as the Fundamental Cause of Long-Run Growth," NBER Working Paper 10481, National Bureau of Economic Research, NBER, Cambridge, Massachusetts, 2004.
9 See, in particular: W.J. Henisz, "The Institutional Environment for Economic Growth," Economics and Politics, Vol. 12, Issue 1, 2000, pp. 1-31.
10 For more on the emergence of institutions, see: V. Tambovtsev, "Vozniknovenie institutov: metodologo-individ-ualisticheskiy podkhod," Voprosy ekonomiki, No. 11, 2010, pp. 83-96.
11 See: D. Acemoglu, S. Jonson, J. Robinson, op. cit.
12 See: Ibidem.
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nal analysis for long-run economic growth. In other words, property rights can be regarded as the causal (underlying) mechanism of the influence of economic institutions on long-run economic growth. So "good economic institutions" should primarily protect property rights.
According to the latest institutional theory of economic growth, the creation of "good economic institutions" is related to the following.
■ First, political institutions are needed that protect property rights and limit and control the government.
■ Second, the number of citizens with extensive investment and innovation opportunities should be increased.
■ Third, the property income of the ruling elite should be limited.
■ Fourth, institutional reform is needed that will ensure the creation of "good economic institutions."
In other words, economic institutions that increase the efficiency of economic growth will emerge when political institutions distribute their power keeping in mind the interests of the greater part of civil society, when political institutions limit and control their power, and when the government has relatively limited property income. A direct link can be traced among political institutions, economic institutions, economic activity (innovation and investment processes), and economic growth.13
In this way, the rates of economic growth, its efficiency, and its quality depend on how the economy is organized and how its development is managed, which economic institutions are functioning, and how they protect property rights. Long-run economic growth can be regarded as a function of "good economic institutions" that create stimuli for effective development.
It should be noted that the concept "good economic institutions" is relative. One and the same set of economic institutions might be satisfactory at one period in time and unsatisfactory at another, acceptable for one country and unacceptable for another. Relatively effective management of economic growth at a specific period in time might eventually become ineffective due to technological or market changes. One and the same set of economic institutions might have a very different effect on economic growth in different countries and at different periods of time. Consequently, we must weigh up the pros and cons of each specific institutional infrastructure of economic growth management.
While examining the role of the institutional infrastructure in economic growth management, the literature often criticizes traditional neoclassical theories and models.14 It is noted that they are not capable of fully explaining long-run economic growth, since the differences in per capita income are explained by the differences in production factors and in the level of physical capital accumulation in particular.
Traditional neoclassical models of economic growth try to show that the standard of living between the developed and developing countries will eventually converge, since these models regard capital formation as the main factor of economic growth. But there is not yet enough evidence to prove this process. The conception of convergence of standards of living can only be justified in certain conditions, that is, the matter concerns only provisional convergence. There is a connection between economic growth rates and initial development conditions. But the difference between countries in terms of standard of living is usually the result of an ineffective institutional infrastructure and inadequate political decisions, that is, a neoclassical traditional approach is clearly insufficient for explaining long-run economic growth.
By giving the political factor ever greater significance, later expanded versions of the neoclassical model somewhat downgraded the hypothesis about the exogenous nature of the innovation and
13 See: Ibidem.
14 See: Ibidem.
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investment processes. These models accept political influence in the short and medium term. Moreover, some of the neoclassical models make it possible to assess the dependence of the efficiency of economic growth on the institutional infrastructure. They even talk of how political decisions can have an effect on the rates and quality of long-run economic growth. They also postulate that production requires not only targeted investments in physical capital, but also investments in human capital. Economic growth models become even more endogenous with the conception of broad capital, in the sense that economic growth rates depend on innovation and investment decisions that are made under the influence of economic institutions and politics.
An attempt is made with the help of the latest endogenous models of economic growth to explain why and how technological changes occur. Technology becomes endogenous, in contrast to models of neoclassical economic growth where technology is regarded as an exogenous factor. In so doing, the role of human capital as a catalyst of economic growth is singled out in particular, while the consequences of investments in human capital are discussed as a source of technological changes.
Based on the above, it can be concluded that political and economic institutions are the main determinants of long-run economic growth: the better the institutions, the higher the rates of economic growth and its quality. Some studies attempt to establish a correlation among the existing political and economic institutions, economic activity (innovation and investment processes), and economic growth. The results obtained show that economic growth greatly depends on the quality of the institutional infrastructure.
For example, well-known British economist Paul Hare examines the universal principles for creating institutional infrastructure and governance, as well as the possibility of adapting them to the conditions of specific countries.15 In his works, he presents convincing proof of the influence of the institutional environment and governance on economic growth and shows how a country's characteristics can impede or accelerate economic growth, and how institutions and governance influence the prospects for economic growth. In his opinion, the requirements of long-run economic growth can be summed up in five points:
■ first, good government, with secure political conditions;
■ second, credible macroeconomic stability;
■ third, savings and investments high enough to maintain long-run economic growth;
■ fourth, openness to the world economy;
■ and fifth, the discipline of external engagement.
In so doing, this growth model needs to be underpinned by two main elements of democracy: protection of property rights and accountability of government. The author claims that any country that performs these theoretical management principles will always achieve high rates of economic growth and raise its quality.
So institutions (both political and economic) and governance are viewed as the fundamental determinants for explaining the differences in economic growth among countries. Inefficient economic institutions are related to political institutions that determine the choice of economic institutions depending on their benefit to the government. So today's explanation of the differences in economic growth and standards of living among countries should be based on an analysis of the structure of the country's government and the nature of its economic institutions.
As we know, in the context of developed democracy, the creation of suitable economic institutions is the result of political choice, which in turn is regarded as a market process. So the formation
15 See, for example: P. Hare, The Political Economy of Growth and Governance, Center for Social and Economic Research, Warsaw, 2007, available at [http://www.case-research.eu/upload/publikacja_plik/13866896_sa337.pdf].
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of an adequate set of economic institutions is tied in with competition.16 Different economic institutions compete among each other, which leads to fundamental interaction, whereby the policy of each institution depends on the citizens supporting it, and citizens' choice of a particular institution depends on the policy of all the institutions.
In post-communist capitalist countries, the prospect of both achieving higher economic growth rates and raising its efficiency and quality largely depends on creating an adequate institutional infrastructure of economic growth management. This will help to realize comparative advantages more fully, on the one hand, and raise the interest of international capital in investing in the economy of these countries, on the other. Based on world experience, institutional reform of the political system can lead to the creation of more suitable and efficient economic institutions that best organize the economy and manage its development, which will ultimately promote long-run economic growth. "Good economic institutions," in turn, should be aimed at creating an institutional infrastructure of economic growth management based on a synthesis of different mechanisms.
Economic Growth Management Mechanisms
In recent years, scientific research has been studying the possibility of generating economic growth using different management mechanisms and a variety of empirical evidence of this has been presented.17 Econometric methods are being used to verify the main theoretical provisions regarding economic growth management and to assess how effective they are.18 Attempts are being made to establish bi-variant correlation and multi-variant causal regression links between specific regulation mechanisms and economic growth. Whereby during this research, management mechanisms are interpreted as the determinants of economic growth performance.
The results of the studies carried out show how important such vectors as macroeconomic management (monetary and fiscal), management of financial systems (innovation and investment processes), management of the economic activity of businesses, regional management, microeconomic management, and so on are for economic growth. The management of economic growth in each of these vectors is carried out by means of a corresponding policy. Whereby the causal correlation between different management mechanisms and economic growth is brought about by means of physical and human capital formation, which is confirmed by econometric analysis.
Macroeconomic management and economic growth. Traditional macroeconomic management oriented toward stability creates general favorable conditions for the development of the national economy. The literature covers this economic growth management mechanism in great depth. There is convincing empirical confirmation of the hypothesis that interrelated monetary and fiscal policy has an impact on economic growth. Taxes are needed to support government spending, but they distort the stimuli, lower the efficiency of resource distribution and, consequently, decrease economic growth. Distorted taxes can have a negative impact on the innovation and investment decisions
16 See: A. Caplin, B. Nalebuff, "Competition among Institutions," Journal of Economic Theory, Vol. 72, Issue 2, 1997, pp. 306-342.
17 See: G. Nicoletti, S. Scarpetta, "Regulation, Productivity and Growth: OECD Evidence," Policy Research Working Paper 2944, OECD Economics Department, The World Bank, Human Development Network, Washington, D.C., 2003, available at [http://wwwwds.worldbank.org/servlet/WDSContentServer/WDSP/IB/2003/03/07/000094946_0301 2304282753/Rendered/PDF/multi0page.pdf]
18 See: H. Jalilian, C. Kirkpatrick, D. Parker, "The Impact of Regulation on Economic Growth in Developing Countries: A Cross-Country Analysis," 2006, available at [https://dspace.lib.cranfield.ac.uk/bitstream/1826/1455/1/ Impact%20of%20regulation-Economic%20growth-March06.pdf].
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of economic entities, on how well the national economy's production and technological potential is used, and ultimately on macroeconomic equilibrium.19
However, the existing macroeconomic theories and models do not make it easy to manage longrun economic growth. As the experience of different countries shows, including post-communist capitalist countries, despite government efforts, macroeconomic management does not always ensure stable economic growth rates and achievement of the desired standard of living. One of the main reasons for this is the fact that macroeconomic management does not fully take into account the impact of other key factors, which will be discussed below.
Regulation offinancial systems and economic growth. Empirical studies confirm the importance of financial systems for economic growth, the impact of which is manifested through innovation and investment processes that promote capital formation and raise the efficiency of its use under the influence of technological progress. A strict correlation has been proven among the degree to which financial systems are developed, the rates at which physical capital is formed, and economic growth,20 as well as between innovation and investment processes and the quality of economic growth.21
The rate of physical capital formation (which is usually determined as the share in investments in GDP) is one of the most important factors of economic growth. But an increase in investments only generates economic growth up to a certain point in time. Then stability sets in, whereby gross investments are only enough to cover the physical outflow of capital. The expanded neoclassical model adds human capital to physical capital, which improves the model's reliability and increases its legitimacy. In so doing, the role of human capital is tantamount to the role of physical capital, since its formation is associated with growth acceleration and movement toward new stability.
Investments in human capital, in particular spending on education and training sessions, play a significant role in economic growth. Technological progress closely correlates with education, since education can not only promote an increase in the qualifications and skills of the workforce, but also have an influence on the innovation processes. In terms of human capital, stable economic growth rates are explained by knowledge externalities with which technological progress is associated. The latest endogenous models link the financial system to economic growth through investments in education and show that the social and economic consequences of raising the overall level of education are rather high.
Regulation of the economic activity of businesses and economic growth. The ambiguous nature of the business environment is a serious threat to economic growth.22 Management of the economic activity of businesses is associated with administrative and bureaucratic procedures for registering newly established enterprises. In many countries, these procedures are too complicated (they require passing through a multitude of stages and applying to all kinds of different agencies), which impedes the population's economic activity. Small and medium businesses are particularly adversely affected by the time it takes to get through these procedures and the corruption they entail. So simplifying the registration of new enterprises and providing them with access to the market has a significant impact on the economic activity of businesses and their integration into the world economy, which undoubtedly has an effect on economic growth.23
Regulation of international trade and economic growth. Trade efficiency is associated with comparative advantages, the use of which determines a country's place in the world economy and
19 See, in particular: Iu. Ananiashvili, V. Papava, "Modeli otsenki vliianiia nalogov na rezultaty ekonomicheskoi deiatelnosti," Ekonomika. Nalogi. Pravo, No. 2, 2010, pp. 67-79; idem, Nalogi i makroekonomicheskoe ravnovesie: Laffe-ro-Keynsianskiy sintez, CA&CC Press, Stockholm, 2010.
20 See: A. De Serres, S. Kobayakawa, T. Slek, L. Vartia, "Regulation of Financial Systems and Economic Growth," OECD Working Papers, No. 506, 2006, available at [http://www.oecd-ilibrary.org/docserver/download/fulltext/ 5l9lxvc56nf6.pdf?expires=1294241983&id=0000&accname=guest&checksum=93E37D40AA71F60415E89D7A5A0BC993].
21 See: Innovatsii i ekonomicheskiy rost, ed. by K. Mikulskiy, Nauka Publishers, Moscow, 2002.
22 See, for example: V. Papava, M. Tokmazishvili, "Necroeconomic Foundations and the Development of Business in Post-Revolution Georgia," The Caucasus & Globalization, Vol. 1 (4), 2007, pp. 84-95.
23 See, S. Djankov, S. McLiesh, R. Ramalho, Regulation and Growth, The World Bank, Washington, D.C., 2006.
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presupposes additional trade gains generated by scale effects. International trade could be endogenous to economic growth if it is the result of a trade policy that reflects restriction in the form of various trade barriers. We are well aware of the ambitious connection between trade policy and economic growth in the European Union (EU) countries. But relatively small countries (for example, Azerbaijan, Armenia, Georgia, and Moldova) are more willing than large countries to engage in international trade regardless of their trade policy. The intensity of international trade in these countries is more likely a result of the development of market processes than of a targeted trade policy.
International relations in the broader sense also have an impact on economic growth, which is associated with the international economic function of specific countries. It often happens that a particular country cannot fully realize its comparative advantages if its international relations both with direct neighbors and with states that have an influence on the world economy and politics do not promote this. It stands to reason that this has a negative effect on economic growth.
Management of R&D and economic growth. In recent years, the range of determinants of economic growth has expanded to include R&D. It is shown that economic growth is higher in countries where R&D is being actively carried out.24 In developed countries, governments are not only involved in research directly, but also indirectly through tax stimuli and the protection of intellectual property rights in order to encourage the private sector to engage in R&D. This policy is leading to a constant rise in how much the private sector is spending on R&D, in the EU countries, for example.
However, government investments continue to make an important contribution to R&D. Whereby some government studies are not directly associated with economic growth since they serve defense, the energy industry, medicine, university research, etc. However, R&D that is not oriented toward business generates basic knowledge with high externality, which will have an impact on economic growth in the long run.
Regional management and economic growth. The scientific literature on the regional economy presents different viewpoints regarding the management of regional economic development, forecasts of the development of specific regions, and ways to make decisions and have an impact on optimizing the development of certain regions using economic tools, which will help to raise the efficiency of the development of the national economy as a whole.25 However, the management of regional economic development is not directly associated with economic growth. The matter mainly concerns the development problems faced by specific regions and how positive examples of resolving specific regional problems can be applied to other regions. But in practice, successful development of even the most progressive regions, as subsystems of the national economy, does not guarantee efficient development of the entire system. The successful development of some regions may be cancelled out by the underdevelopment of other regions, resulting in no overall economic growth at all or it being insufficient. So a close connection must be established between the management of regional economic development and economic growth,26 that is, the systemic effect of regional development must be identified and qualitatively assessed from the viewpoint of economic growth.
Environmental protection management and economic growth. The influence of environmental protection on economic growth can be manifested through various channels. There are two viewpoints on economic growth management keeping in mind negative environmental effects:
■ first, the environment does not limit economic growth and the income it subsequently generates makes it possible to resolve any environmental problems that may arise;
■ second, the environment does limit economic growth because production resources are spent on environmental protection.
24 See: C.I. Jones, "R&D-based Models of Economic Growth," Journal of Political Economy, Vol. 103, Issue 4, 1995, pp. 759-784.
25 See, for example: A.G. Granberg, Osnovy regional'noi ekonomiki, TACIS, Moscow, 2001.
26 See, for example: M. Achelashvili, K. Achelashvili, "Regional Management of Economic Growth," The Caucasus & Globalization, Vol. 1 (5), 2007, pp. 54-65.
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Technological progress, which makes it possible today to create environmentally pure and reliable production units, plays an important role in resolving the conflict between economic growth and environmental protection. So it is expedient from the beginning to try and avoid or minimize the undesirable external effects and negative consequences of economic growth. A corresponding government policy could play an important role in this. But the existing models do not make it easy to show the influence of environmental factors on economic growth. Alternative models must be created that take into account both economic growth and the resolution of environmental problems.
Other management mechanisms and economic growth. The use of microeconomic economic growth management mechanisms proposes solving more specific practical issues, in particular by having an impact on production factors. Management of the market's ability to adapt to new technology and innovations, or management of the redistribution of resources (for example, the redistribution of financial capital to new markets, etc.) can play a specific role in economic growth. Economic growth can be viewed as a function of the population and per capita consumption, that is, economic growth management presumes control over both of these factors.
So each of the mechanisms examined above has a specific function in overall economic growth management and all the intercoordinated and complimentary mechanisms put together should form the basis of the institutional infrastructure of economic growth management. However, we do not yet have a single institutional infrastructure that unites the coordinated mechanisms of economic growth management.
Role of the Institutional Infrastructure of Economic Growth Management in Post-Communist Capitalist Countries (A Georgian Case Study)
In post-communist capitalist countries, long-run economic growth largely depends on the economic function each of these countries performs and the extent to which its comparative advantages are realized. Defining the economic function which is based on comparative advantages largely depends on the institutional infrastructure of economic management. This is a fundamental factor, particularly for relatively small countries, when defining national economic development strategy. However, the state of the economies of the post-communist capitalist countries as relatively new state formations makes this a difficult task to solve. Although it stands to reason that after the collapse of the socialist system, certain economic ties have been preserved and, what is more, integration relations are being established with the world community. However, the current degree of international integration of the post-communist capitalist countries into the world economy is clearly not sufficient for realizing their comparative advantages,27 which naturally has an effect not so much on the rate of economic growth as on its efficiency and quality. So now it is becoming particularly important for the post-communist capitalist countries to interact among themselves in order to create conditions for long-run economic growth. A strategy toward economic partnership among these countries could become a foundation for further development, as well as ease the search for and, most important, the realization of comparative advantages. A good case in point are the projects to create regional clusters in the Central Caucasus,28 the purpose of which is to raise the competitiveness of this region's countries in terms of long-run economic growth.
27 For example, the prospects for realizing comparative advantages and integration of the Central Caucasian countries into the world economy are examined in the following monograph: E. Ismailov, V. Papava, Tsentral'niy Kavkaz: is-toria, politika, ekonomika, Mysl Publishers, Moscow, 2006, pp. 117-114.
28 See: Ibid., pp. 125-126.
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Resolving the problem of economic growth in post-communist capitalist countries also requires reinforcing the private property institution, which is extremely important in terms of liberalizing the economy and raising long-run economic growth rates. In some of these countries, more or less contemporary institutions that ensure the protection of property rights and limit corruption have already formed. But in many countries, property rights are frequently violated, whereby every time the redistribution of property is carried out in favor of the newly formed ruling elite. Drawing up liberal laws capable of forming and developing a market environment should become the basis for reinforcing the institution of private property.
Post-communist capitalist countries also have the problem of so-called institutional traps, which imply the stable functioning of inefficient institutions.29 Institutional traps are the unforeseen result of inadequate economic policy. The emergence of institutional traps and, most important, their stable functioning is extremely detrimental when carrying out reforms, since it slows them down and makes them ineffective. Extrication from institutional traps often presumes fundamental and extensive organizational changes.30
In so doing, mechanisms might eventually spontaneously form in the adapted economic system that help the economy to extricate itself from institutional traps. However, if the market structure is deficient, the economic system might begin to move in an inefficient direction and continue this movement until a critical phase in its development begins. A classical example of this is the development and collapse of the command-administrative economy.31 Whereby the inability of governments to find a way out of institutional traps could become a reason for economic crises not only in the post-communist capitalist countries, but also in developed countries. This is shown in particular by the global financial and economic crisis that has been unfolding in recent years.
When carrying out institutional changes in the post-communist capitalist countries, institutional traps must be forecast and avoided as much as possible by means of corresponding economic policy. In order to prevent institutional traps from becoming a permanent feature, timely dismantling of inefficient institutions should be planned from the very beginning. For this purpose, diversity must be maintained in institutional forms, since in post-communist capitalist countries it is not always clear what role a particular institution plays in achieving institutional equilibrium and how effective a particular institution will be in the long run.32 The more flexible the institutional infrastructure, the more opportunities there are for getting out of institutional traps. In so doing, it should be kept in mind that institutions that are efficient in some post-communist capitalist countries are not always capable of efficiently functioning in others.
In this context, post-communist transformation is accompanied by the emergence of several specific problems, one of which is a necroeconomy (dead economy).33 This phenomenon is associated with the manufacture of uncompetitive products, for which there is essentially no market due to the low quality and high costs. The necroeconomy formed on the material and technical foundation of the command-administrative economy and continues to function today. The key to finally resolving this problem is seen in the evolutionary theory of change.34
A necroeconomy serves the interests of certain social groups that are interested in its existence and maintenance. It goes without saying that it has a negative effect on the level and quality of eco-
29 See: V.M. Polterovich, "Institutsionalnye lovushki i ekonomicheskie reformy," Ekonomika i matematicheskie metody, Vol. 35, Issue 2, 1999, pp. 3-20.
30 See: E.V. Balatskiy, "Funktsionalnye svoistva institutsionalnykh lovushek," Ekonomika i matematicheskie meto-dy, Vol. 38, No. 3, 2002, pp. 54-72.
31 See, V.M. Polterovich, op. cit.
32 See: Ibidem.
33 See: V. Papava, "Nekroekonomika—fenomen postkommunisticheskogo perekhodnogo perioda," Obshchestvo i ekonomika, No. 5, 2001, pp. 22-30; V. Papava, Necroeconomics. The Political Economy of Post-Communist Capitalism (Lessons from Georgia), Universe, New York, 2005.
34 See: Ibidem.
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nomic growth. So continuing to maintain inefficient enterprises means cancelling the prospects for efficient development of the national economy as a whole. A necroeconomy can only be destroyed by carrying out corresponding institutional reforms, which is primarily associated with resorting to bankruptcy legislation. However, eliminating a necroeconomy must be accompanied by forming a stable macroeconomic environment for the newly created progressive companies.
In recent years, the global financial and economic crisis has been leading to the development of so-called zombie economies,35 which have become widespread not only in developed, but also in developing countries.36 The zombie economy phenomenon implies that the government supports essentially bankrupt enterprises through the banking system. This results in the creation of a network of zombie banks and zombie enterprises which form the basis of a zombie economy. Zombification of the economy is particularly dangerous for the post-communist capitalist countries, since it means the merging of both the zombie economy and the necroeconomy.37 Zombification of the necroeconomy in the post-communist capitalist countries could lead to more serious consequences than in developed countries since it aggravates crisis manifestations, which will naturally have a negative effect on economic growth.38 So both of these extremely undesirable phenomena of present-day economic reality should be taken into account when forming the institutional infrastructure of economic growth management in post-communist capitalist countries.
Eliminating the necroeconomy and zombie economy will make it possible to stimulate development and efficient economic growth. Specific management mechanisms are needed that will decrease the negative impact of the necroeconomy and the zombie economy on long-run economic growth. But this requires that the governing elite manifests the corresponding political will. Efficient bankruptcy laws are the only effective way to get rid of both the necroeconomy and the zombie economy.
Moreover, institutional reforms are often criticized for their forced and simplified ap-proach,39 which hampers the establishment of a market economy in post-communist capitalist countries. The thing is that new institutions, which are usually created under the pressure of authoritative international organizations and imitate the developed market standards of their Western originals, often turn out to be unacceptable in local conditions and can even have negative side effects in terms of economic growth. In particular, the IMF has been extremely stubborn about imposing a formal approach to institutional reforms on the post-communist countries, in particular in the tax sphere, which has not helped to accelerate market processes and has even hampered economic growth to a certain extent.40
In Georgia, for example, no active efforts were made before the Rose Revolution to create an institutional infrastructure, although it was deemed necessary to form institutions that would stimu-
35 The zombie economy phenomenon as such emerged at the beginning of the 1990s in Japan after the financial crisis (see, for example: A.G. Ahearne, N. Shinada, "Zombie Firms and Economic Stagnation in Japan," International Economics and Economic Policy, Vol. 2, No. 4, 2005).
36 See, for example: T. Hoshi, "Year of the Zombie," Roubini Global Economics, 21 January, 2009, available at [http://www.rgemonitor.com/asia-monitor/255220/year_of_the_zombie]; F. Poschmann, "Beware of Zombies," Financial Post, 26 January, 2009, available at [http://network.nationalpost.com/np/blogs/fpcomment/archive/2009/01/26/beware-of-zombies.aspx]; J. Stepek, "How Zombie Companies Suck the Life from an Economy," MoneyWeek, 18 November, 2008, available at [http://www.moneyweek.com/news-and-charts/economics/how-zombie-companies-suck-the-life-from-an-economy-14089.aspx].
37 See: V. Papava, "Problema zombirovaniia postkommunisticheskoi nekroekonomiki," Vestnik instituta Kennana v Rossii, Issue 15, Moscow, 2009, pp. 37-49.
38 See: V. Papava, "Economy of the Post-Communist Capitalism under the Financial Crisis," Studies in Economics and Finance, Vol. 27, No. 2, 2010, pp. 135-147.
39 See: V. Papava, T. Beridze, Ocherki politicheskoi ekonomii postkommunisticheskogo kapitalizma, Delo i Servis, Moscow, 2005, p. 193.
40 See, for example: V. Papava, "O nekotorykh oshibkakh Mezhdunarodnogo valiutnogo fonda v Gruzii," Voprosy ekonomiki, No. 3, 2002, pp. 99-112.
THE CAUCASUS & GLOBALIZATION
late the development of a market economy.41 After the revolution, real institutional reforms began in state-building.42 For example, the legal foundations of economic development management were drawn up; institutions that control tax collection and tax discipline were formed; reform of the business environment was carried out; the bureaucratic procedures and registration regulations for new companies entering the market were simplified, and so on. These reforms were aimed at bringing down the barriers hindering economic business activity and stimulating the innovation and investment processes in the country. It resulted in a rise in Georgia's competitiveness on the international arena, which made it easier for the country to integrate into the world economy. This brought about a noticeable rise in economic growth rates up until the Russian-Georgian conflict in August 2008 and before the beginning of the global recession in the world economy.43 However, despite the relatively high economic growth rates, many mistakes were made in reforming post-revolutionary Georgia,44 which have done nothing to raise the country's standard of living.
In Lieu of a Conclusion
The creation of an efficient institutional infrastructure of economic growth management in post-communist capitalist countries is a long and often contradictory process, aggravated by the problems encountered during the transition to a market economy and the recent economic crisis. The main attention of the reformative governments of these countries should be focused on forming an adequate institutional infrastructure that ensures the necessary political and practical conditions for long-run economic growth. The ruling elites should clearly understand the role of political and economic institutions in contemporary development and have a responsible attitude toward their creation, particularly when carrying out reforms.
Introducing a new institutional infrastructure of economic growth management requires a certain amount of adaptation time. During institutional innovations, which affect the interests of different social groups, plans for so-called intermediate institutions should be drawn up. Whereby state paternalism should not predominate when forming the institutional infrastructure, as is the case in many post-communist capitalist countries, but rather a synthesis of market and institutional approaches to management. It is also important that the institutional infrastructure of economic growth management meet the contemporary trends in national and global economic development.
The interdependence of the different economic institutions among themselves, the certain amount of inertia in their development and, consequently, the likelihood of institutional conflicts arising should also be kept in mind. This will make it possible to gain a better understanding of the reasons for economic crises and forecast their consequences.
41 See: P. Leiashvili, Georgian Reforms in the "Institutional Trap," Aisi, Tbilisi, 2003 (in Georgian).
42 See: V. Papava, "Ob osnovnykh makroekonomicheskikh indikatorakh 'revoliutsii roz' v Gruzii," Obshchestvo i ekonomika, Nos. 7-8, 2004, pp. 103-112.
43 See: V. Papava, "Georgia's Economy: Post-Revolutionary Development and Post-War Difficulties," Central Asian Survey, Vol. 28, No. 2, 2009, pp. 199-213.
44 See: V. Papava, "'Rozovye' oshibki MVF i Vsemirnogo banka v Gruzii," Voprosy ekonomiki, No. 3, 2009, pp. 143-152; V. Papava, "Anatomical Pathology of Georgia"s Rose Revolution," Current Politics and Economics of the Caucasus Region, Vol. 2, Issue 1, 2009, pp. 1-18.
