CC BY
19
THE CAUCASUS & GLOBALIZATION
Ramaz ABESADZE
D.Sc. (Econ.), Professor, Director of the Paata Gugushvili Institute of Economics
(Tbilisi, Georgia).
Vakhtang BURDULI
D.Sc. (Econ.), Department Head at the Paata Gugushvili Institute of Economics
(Tbilisi, Georgia).
REGIONAL PROBLEMS OF ACCELERATING ECONOMIC DEVELOPMENT RATES IN THE CONTEXT OF GLOBALIZATION (A GEORGIAN CASE-STUDY)
Abstract
This article substantiates the need for coordinating regional development in a post-communist country with globalization. It examines the ways being employed today to coordinate regional development in Georgia. Keeping in mind the experience of developed countries and the specifics of the transition period, it identifies and
validates the vectors for improving a strategy of regional economic and social development and enhancing the system that coordinates and stimulates this development. Taking into account the current experience of several developed and developing countries, the paper offers ways to decentralize public administration in Georgia.
KEYWORDS: Georgia, development of the regions, economic globalization, "easy loan," employment, decentralization.
Volume 7 Issue 3-4 2013 HHECAUCASUSnGLOBAfflZATON 51
Introduction
For several years now, ever since economic mechanisms of globalization have begun emerging, many developed and developing countries have set out to improve and restructure regional coordination systems of social and economic development aimed at expanding the functions and powers of regional administration bodies not only to resolve social and infrastructural issues, but also to coordinate business development. It can be said that both globalization and regionalization are underway within the country. That is, globalization, which is manifested in the economic sphere in the evolving functions of global and inter-state regulation structures (primarily the WTO) and lending, for example, requires adaptation of the functions of state and regional intrastate coordination and regulation structures. France and South Korea are examples of countries where regional coordination mechanisms have been successfully adapted to contemporary conditions. In these countries, the development of regional coordination has been widely covered in the scientific and journalistic literature. Some of the regionalization measures being carried out in European countries are set forth in the European Charter of Local Self-Government, which Georgia has also joined. Many countries are adhering to the provisions of this charter when implementing measures aimed at enhancing regional and local coordination of social and economic development. However, this charter does not cover issues pertaining to centralized state coordination of regional development, or issues of state and regional development coordination and business support. During the transition period, the post-communist countries have also begun looking for regional development coordination mechanisms that are expedient for each specific country and can be adapted to globalization conditions. In several Central European post-communist countries, coordination mechanisms have been formed that correspond to current globalization conditions. Several post-Soviet countries, including Georgia, are a little tardy in carrying out measures to adapt regional development coordination systems to the challenges of globalization. This article examines the situation that has developed as of today in the country with respect to regional economic and social development coordination and designates and validates ways to improve these coordination mechanisms in the context of globalization, keeping in mind the experience of countries that are developing successfully.
Improving Regional Coordination of Economic and Social Development as an Important Component of All Measures to Raise the Country's Economic Development Rate
Georgia has recently made a certain amount of progress in economic development. For example, between 2004 and 2012, Georgia's GDP rose annually by 8-10%. Compared with other countries, Georgia was able to ride fairly easily through the global financial and economic crisis and economic consequences of the August war. The only adverse effects were a slight slowing of its GDP growth rates and an increase in its already high unemployment index. For example, whereas in 2007 the share of unemployed in the economically active population amounted to 13.3%,' in subsequent years it topped 16%.
Georgia was saved from a significant slump during the crisis by the assistance it received from developed countries after the August war and the relatively low level of its financial and production integration into the world economy.
1 See: Statistical Yearbook of Georgia, 2009, p. 42.
THE CAUCASUS & GLOBALIZATION
However, a comparison of the indices of the current state of the economy with the indices of the pre-landslide period (although at that time production operated largely on outmoded technology) shows that many of the current indices are still no higher than the pre-landslide level (as, incidentally, is the case in several other post-Soviet countries). Industrial growth has long been relegated to the back burner, the operations of many pertinent traditional branches have been curtailed, while agricultural production has been cut back in recent years. So in order to reach the level of production that existed in the pre-landslide period, even higher GDP growth rates must be reached, primarily by increasing industrial and agricultural grown rates. This requires implementing several measures to improve the structure of the economy broken down into branches of activity, pursuing a more rational industrial and agricultural policy, and so on.
This goal can primarily be reached by pursuing an effective regional policy aimed at accelerating economic development of both the country as a whole and of its regions in particular.
At present, Georgia is divided into 12 regions (territories) at the first level of administrative-territorial division. According to the nomenclature of territorial units for statistics (NUTS)2 classification used in the EU, they all (apart from Tbilisi) approximately relate to NUTS 3 level. In addition to this, there is division into local self-administrative territorial units. Hereafter, this article refers to the country's first-level territorial units of administrative-territorial division as regions, while the rest are called territorial units of the local level.
In order to resolve such tasks as improvement of the country ' s export-import balance, acceleration of industrial and agricultural growth, development of industrial hubs and innovation centers, improvement of the institutional and technological structure of production, diversification of the regional economy, development of production regional servicing systems, laying down regional development programs, and so on, among other measures, the role of state coordination of the country's economic and social development at the level of regions and local territorial units must be intensified, primarily at the first level of the country's administrative-territorial division, that is, in the regions (territories).
Georgia's economy is currently in a state of post-socialist transformation. Compared with developed countries that have an established market economy, it is in need of additional measures to create a contemporary business environment that meets current competitive conditions and is capable of organizing a highly efficient economy. Therefore, in contrast to countries with an established market economy, Georgia must focus more attention on rendering assistance to business development and creating a corresponding business environment in state regulation of social and economic development, including at the regional level during the transition period. This should be its top priority.
Current State of Regional Development Regulation
Georgia has long failed to give due attention to social and economic development regulation at the regional level. Development strategies have still not been drawn up for specific regions (which are particularly needed since many enterprises equipped with outmoded technology closed down during the collapse of the Soviet system), nor is there a budget and tax system at the regional level, which is a rare exception for developed countries. Even in such a small country as Denmark, for example, there is an efficient three-tier tax and budget system,3 while such systems also exist in
; See: Regionalnaiapolitika stranES, IMEMO RAS, Moscow, 2009, p. 11
' S. Kuzmin, D. Kuzm Ekonomist, No. 3, 2003, p. 56.
3 S. Kuzmin, D. Kuzmin, "K stanovleniiu mestnogo samoupravleniia: ekonomika i sotsialnoe razvitiie naseleniia,'
THE CAUCASUS & GLOBALIZATION
medium-sized and large countries. Local budget and tax systems are built on the basis of an outmoded mechanism in which central transfers account for the largest share, while local taxes and dues are insignificant. This lowers the responsibility of local structures and curtails their rights to dispose of local budget funds and take the initiative in their spending.
At present, a one-tier system of local self-government operates in Georgia, according to which 69 units of local self-government have been created: 64 municipalities and 5 self-governing cities. Local budgets are formed within the boundaries of these units. According to the Budget Code adopted at the end of 2009, local taxes (property tax) and dues, compensatory transfer, and other revenues envisaged by Georgian legislation are considered local own-source revenue. Targeted and special transfers and other revenues set forth in Georgian legislation are classified as external (raised) funds. Local budgets do not receive withholdings from the basic taxes that form the main bulk of tax revenues in the country (income, profit, VAT, excises, and import tax). This shows the insignificant role of own-source tax revenues in the local budgets, in the formation of which an increasing role is played by the budget transfer policy.
Some of the reforms carried out in the past few years have played a positive role in regional development. For example, in 2007, an addendum was made to the Law on Georgia's Budget System about creating a fund for proj ects to be implemented in the Georgian regions, which was later enforced in the new Budget Code of 2009. Resources are allotted from this fund to first-tier regions of the country's administrative-territorial division. Resources from the reserve funds of the Georgian president and government are playing a special role in economic development.
In 2002, the Georgian Ministry of Economics, Industry, and Commerce introduced a document On Methodical Recommendations for Developing and Implementing Economic and Social Development Programs for Georgia's Territorial Units, on the basis of which in 2003-2005 regional development programs were drawn up. However, after the Law on the Fundamentals of Georgia's Indicative Economic and Social Development Plan was abolished, regional social and economic development plans stopped being drawn up.4 Nevertheless, several national programs and projects are aimed at regional development, such as the Millennium Program (supported by a grant from the U.S. government), the Regional Development Fund project, the Easy Loans Program, employment programs, and so on.5 These programs are making a contribution to regional economic and social development; however, it would be more expedient to draw up scientifically substantiated target programs at the regional level.
The regional fiscal and financial systems either have no permanent regional investment, social, or other types of funds at all or they operate periodically in small doses.6 These funds should be supplied in part from budget resources and in part from all kinds of grants (including private). Nor do the regions, or the country as a whole, have a securities market for actualizing real investments on a large scale.
The economy of regional centers and small towns is not developing quickly enough in Georgia. Economic development of small towns is however a priority in developed countries,7 although they began taking the appropriate steps much earlier.8 For example, as early as the 1980s, diversification of the economy of so-called mono cities began in Great Britain, France, and several other countries
4 See: Ia. Meskhia, E. Gvelesiani, Regional Economic Policy, Tbilisi, 2010, pp. 185-186 (in Georgian).
5 See: Ibid., pp. 186-193.
6 See: Ibid., pp. 184-200.
7 See: V. Burduli, Coordination of Social and Economic Development at the Regional and Local Levels, Meridiani, Tbilisi, 2006, pp. 160-178 (in Georgian); D. Lopatnikov, Ekonomicheskaia geografiia i regionalistika, Gardariki, Moscow, 2006; Regionalnaia politika stran ES.
8 See: P. Didier, "Le Nord-Pas-de-Calais face aux nouvelles dynamiques économiques: practiques et ejeux de l'aménagement regional," Hommes et Terres du Nord, No. 4, 1989; P. Martin, H. Nonn, "Stratégies des acteurs publics en Alsace en matière de dévelopment économique et d'amenagement: 1982—1989," Hommes et Terres du Nord, No. 4, 1989.
THE CAUCASUS & GLOBALIZATION
(the protests of redundant miners in England in the 1970s activated this process). Russia is also beginning to give this some thought: "The state should provide the opportunity for people to earn money, by establishing mono cities, for example, to solve the problem of the planned economy."9 Such auxiliary structures as engineering, marketing, and other organizations that serve the development and functioning of technology and assist product sale have still not been formed in the regional centers of Georgia. Such business development-enhancing financial centers as regional depositaries, agricultural information support centers, and so on are not being established. Nor have steps been conceived for creating other elements of a favorable investment environment.
Not enough attention is being given to the development of regional industrial hubs. Compared with the Soviet period, the role of such regional industrial centers as Kutaisi, Batumi, and Poti has even declined. Of course, a major industrial hub cannot be created in every region. However, this should be done in those regions where there are favorable conditions for it, such as Ajaria, Samtskhe-Javakhetia, and Samegrelo-Upper Svanetia (the cities of Zugdidi and Poti). It should be noted that individual modern industrial enterprises have begun opening in Georgian cities in recent years (for example, a factory for the manufacture of reinforced plastic in Tbilisi, a factory for the assembly of household appliances in Kutaisi, and so on), but this is clearly insufficient. A targeted strategy must be drawn up and implemented in order to help local and foreign businessmen establish modern enterprises in industrial hubs in the Georgian regions.
Agricultural development in the regions is impeded for the following reasons:
(a) the use of arable land has dropped in all regions of Georgia (a large percentage of farm land is not used), there has been a production drop in both plant and animal products due to the import of cheap foodstuffs and other goods that use raw agricultural material, whereby there are delays in establishing an agricultural organization in which all products would be competitive (particularly in price competition) in the internal and external markets. What is more, imported products are sold in retail markets at an artificially raised price, so an artificial mechanism may exist that prevents the sale of domestic agricultural production in the interests of importers, although most types of domestic agricultural products are environmentally purer and of a higher quality;
(b) the proper attention is not being paid to the institutional organization of agricultural enterprises and households. In particular, there are few cooperatives at which agricultural operations can be carried out more efficiently, households and small farms are not rendered the necessary services from auxiliary organizations and enterprises, while it is difficult for small farms, for example, to purchase expensive machinery, which, along with specialized services, would serve a large number of enterprises (farms and households);
(c) there is less demand for the services of plant-cultivating and cattle-breeding stations (farms), resulting in a drop in or overall halt to the manufacture of some agricultural products that are highly competitive. For example, there has been an abrupt drop in the production of high-quality apples, such as Iberian and different types of Antonovka. The demand for rose wines is increasingly growing, while Georgia is no longer cultivating Rkatsiteli grapes;
(d) due attention is not being given to strengthening interrelations between agricultural enterprises and enterprises manufacturing their products, or to streamlining institutional relations between them;
(e) there are still no efficient marketing and other services for promoting agricultural products in the markets (particularly international), there are no consulting services (as practiced in developed countries in which such organizations are mainly located in regional centers) for
9 "My posle krizisa. V. Nikitina interviews Director of IMEMO A.A. Dynkin," AiF, No. 35, 2010, p. 7.
THE CAUCASUS & GLOBALIZATION
providing farmers with consultation and information about efficient farming, about sowing times for particular crops, about weather conditions, about terms for purchasing fertilizers and other things necessary for manufacturing agricultural products, and so on;
(f) very little attention is being given to innovations in agriculture. U.S. and European experience in carrying out land recultivation, improving soil fertility, and raising harvest yield should be made use of (for example, the harvest yield of grains in Georgia is 2.5-fold lower than in the U.S. and advanced European countries);
(g) although there is a shortage of land, attention is not being paid to preserving arable farm land. For example, high-quality farm land adjacent to city suburbs is often allotted to urban settlement instead of providing amortized building sites for city expansion.
Improving the Regional Development Strategy
The regional development strategy should envisage improving regional and local regulation mechanisms of economic and social development broken down into different levels of territorial formations. The rapid development of new technology in the world and intensified competition in the external and internal markets are causing difficulties in developing export-oriented and import-substituting enterprises. Some of the farm land in the regions is lying idle, which is causing a rise in unemployment and the poverty level. This is making it more important to activate the operation of enterprises at the regional and local levels, which requires the development of the corresponding support infrastructure and use of stimulating tools.
The new conditions are raising the importance of efficiently reaching a compromise of interests among the central, regional, and local power structures. The regions are playing a greater role in implementing different kinds of innovation processes around the world, while regional cities and local businessmen have more to do in developing new technology. The problems of agricultural development also require greater activation of the regional and local regulation mechanism (but the center must also assist in stimulating production in rural areas). So in order to promote the development of local business, the regional power structures must play a more active part in coordinating economic development. In many countries, including in small ones, a socially oriented economy is developing, which means that several social functions must be transferred to the regional and local levels. So the rational distribution of competences and powers among levels of governance is an important prerequisite today for ensuring the country's accelerated economic and social development and causing a significant drop in the level of poverty in the regions (this urgent question is examined in greater detail in the last section of this article).
Improvement of the institutional system should be carried out at all territorial levels. Capacities at the regional level are weak at present in Georgia (apart from Tbilisi and the Ajarian Autonomous Republic). However, in many developed countries, it is the regional administration structures that are responsible for coordinating the goals designated by the state strategy of regional social and economic development, assisting business, developing centers of gravity in the regions, and so on. The regional administration structures must be given greater powers in order to perform these tasks (without adding more people to their staffs). They must also be given corresponding tools and increased responsibility. The powers of local government bodies should also be increased, particularly in assisting employment and creating local social projects aimed at reducing the poverty level (a social package should exist at all power levels and be coordinated with resolving the designated tasks).
THE CAUCASUS & GLOBALIZATION
The regional development strategy should envisage tasks for promoting the establishment of a contemporary technological system. At the regional level, this presumes the following: choosing priority branches for development (in the cities and villages) keeping in mind the conditions and specifics of the region; drawing up a corresponding policy; and assisting the development of regional centers of gravity and innovation centers, etc., which will ensure an increase in employment and a drop in the poverty level based on the development of export-orientated, import-substituting, and other pertinent enterprises, as well as help to create the infrastructure, auxiliary facilities, and enterprises necessary for their functioning.
In present-day conditions, diversification of regional production (in the cities and villages) has become even more urgent. Whereas 30-40 years ago, this process was largely related in the developed countries to the need to avoid mono specialization or narrow regional specialization, now the likelihood of a depressive regions emerging has increased due to the short life cycle of some types of production (particularly high-tech) and the technology itself used to manufacture these products. The importance of regional diversification has grown in rural areas as the stability of their natural conditions decreases, as well as due to other phenomenon (for example, the exorbitant spread of pests in certain plants). The terrain in rural Georgia, as well as the need to ensure the country's food safety should the price of a particular agricultural product suddenly rise also call for production diversification.
A regional strategy for developing small and medium centers of gravity must be drawn up. These centers should draw on different enterprises from the real, financial, and auxiliary sectors, which will reduce infrastructural expenses and provide work for the unemployed living in the corresponding cities, as well as jobless people migrating from the village to the city. It stands to reason that the development of regional centers of gravity will ensure intensified diversification of the regional economy and decrease the regional aspects that aggravate poverty. This trend in the developed countries has existed since the 1960s, but these countries have been paying greater attention to this problem recently.10 "The contrast between the region around the capital and the provinces is an indication of how mature the territorial structure of the economy is. The greater this contrast, the lower the development level of the territorial structure of the economy and the country."11 Since Georgia is a small country, the term "growth pole" cannot be used to describe most Georgian cities since it primarily implies the development of a metropolis or an agglomeration of adjacent cities. In our opinion, a more acceptable term for the conditions existing in the Georgian regions is "center of gravity." The development of this kind of unit should be based on production diversification, while auxiliary production should also be developed (in order to help solve the problems of industry, agriculture, export, and so on). It is obvious today that an innovation sector must be developed in cities-centers of gravity.
It is very important to draw up a strategy for simulating the creation and functioning of auxiliary services and companies (farms in the rural areas) characteristic of the market economy that assist the main production enterprises. In addition to financial services and organizations (funds, banks, or their branches, regional depositaries, insurance companies), centers of gravity should also have engineering, marketing, consulting, and information enterprises and organizations that will service urban and rural needs. Innovative plant-cultivating and cattle-breeding enterprises equipped with the latest technology, enterprises for rendering technical services to small farms, amelioration enterprises, enterprises that assist land recultivation, and forest care services must be developed in rural areas. Establishing advanced training organizations is also extremely important (both in the villages and in the cities) so that businessmen and hired workers can acquire the knowledge necessary for manufacturing competitive products in contemporary conditions. These organizations and enterprises will ensure an
1 See, for example: D.L. Lopatnikov, op. cit., p. 93 ff.; Regionalnaiapolitika stranES, pp. 131-133 ff. 1 D.L. Lopatnikov, op. cit., pp. 46, 47.
THE CAUCASUS & GLOBALIZATION
increase in investment activity in both the cities and villages. This will promote the exploitation of unused land, which is very important given the land shortage in Georgia. However, farm land must not be sold to foreigners, since this will be detrimental to the local population and cause negative demographic trends. In many civilized countries (Australia, Israel, China, Sweden, etc.), there is no private ownership of land at all.12
It is extremely important to draw up the right strategy for correlating large, medium, and small businesses. Sustainable development of the economy cannot be attained without the existence of large enterprises equipped with the latest technology. The regional development strategy must envisage, keeping in mind the special features of the regions wherever possible, the creation of new large enterprises in specific branches or the reanimation of old ones based on new technology (by local businessmen purchasing and developing state-of-the-art technology or establishing enterprises of transnational corporations in regional cities). As we know, large enterprises based on cooperative relations provide work for a large number of small and medium businesses. It stand to reason that a large number of big enterprises cannot be established in Georgia's regions, however the need for diversifying the regional economy and overcoming poverty calls for creating medium and small businesses in many branches, both in the main sector of production and in the infrastructural and service sectors. Cooperatives based on family holdings must be set up in rural areas to promote effective economic growth. However, Georgia's difficult terrain and other reasons (for example, the need to provide full employment for rural residents, the need to avoid depopulation of the villages, and so on) also make it necessary to assist and stimulate the establishment of intensive small holdings in the countryside. The practice of increasing efficiency in small-scale intensive farming can be developed by studying the experience of some developed countries. The strategy offered will ensure rise in the competitiveness of enterprises of all sizes, increase the density of technological and transaction relations among them, and raise the level of production intensification and employment of the population.
Improving
the Regional Development Coordination and Stimulation System
In order to create a favorable investment and economic climate that enhances the functioning of existing enterprises, steps must be taken to improve this climate at the regional and local levels. This requires establishing corresponding institutions and organizations (managerial, financial, and production), as well as creating regulation tools, at the regional and local levels.
At present, some functions of economic management are being decentralized in developed countries and the share of the investment part is growing in the budgets of all levels. Some developed countries, particularly those with a powerful export potential, allot special lines in their budgets for supporting priority branches of the private sector, the funds of which are used either directly or with the help of organizations created especially for this purpose (for example, the investment bank and depressive cartels13
12 See: M. Korobeinikov, "Krestianstvo i vlast: otvetstvennost i interesy," in: Voprosy ekonomiki, No. 2, 2010, p. 151.
13 Such associations have been established in branches that are having serious difficulties, in which a large surplus of production capacities appeared. With the assistance of the government, cartels agreed on a voluntary cutback in manufacture and to preserve only the most efficient subdivisions, while also agreeing to sell or re-profile surplus capacities. The operations of depressed cartels were financed by commercial banks under the government's guarantee. Small businesses provided jobs for those employees who were laid off.
THE CAUCASUS & GLOBALIZATION
in Japan), while some countries have special organizations for supporting food export. Reaching a compromise among management levels, in addition to decentralizing some management functions, also envisages decentralizing budget funds in an adequate amount. For example, investment, pension, insurance, and other funds (the resources for which are allotted to some extent from budget funds among other things) are often also formed at the regional level in developed countries. Decentralization within certain limits of competence promotes an increase in the responsibility of regional bodies for the development and efficient functioning of business, an increase in the population's prosperity, and a decrease in the poverty level within the boundaries of the corresponding territorial unit. Functions dispersed after a compromise of interests has been reached among levels are performed on the basis of a corresponding distribution of resources. In some countries, the overwhelming majority of budget funds (more than 80%) is mobilized in the central budget, after which they are distributed among the budgets of different levels with the aid of various transfers (whereby in different countries these transfers have different names and are intended for different purposes, for example, subsidies and grants, subventions, special subsidies). However, in several countries, regional and local budgets were largely formed directly within the limits of territorial subdivisions. This requires not only for local budgets to be replenished by local taxes, but also by revenues from central taxes mobilized in the particular territory.
Improvement of the regional fiscal mechanism requires creating a tax and budget mechanism that corresponds to contemporary conditions. We think the country's budget and tax system requires improvement.
■ First, there is no budget and tax system at the regional level, while globalization will promote an increase in the functions of regional management in developed countries, particularly in the sphere of business support and the creation of a regional production infrastructure. A corresponding system must be created at the regional level, particularly since the example of the Ajarian Autonomous Republic shows its benefit in supporting business development, raising employment, and lowering the poverty level.
■ Second, some dues that exist in Georgia are considered taxes in some developed countries (for example, the U.S.) and are allocated to the territorial budgets of the corresponding level.
■ Third, the regions of several developed countries adopt the practice of granting tax benefits if new jobs are created at enterprises, a practice that would be expedient to introduce in the regions of Georgia.
Regional financial policy should be aimed at stimulating the creation of new enterprises equipped with state-of-the-art technology and at supporting existing ones. The priority criteria for creating or promoting the efficient operation of enterprises should be their export potential and the possibility of import substitution, as well as their potential for supporting full employment of the population (with high salaries and the guarantee of long-term employment). Regional financial policy should envisage the creation of investment and other types of funds (not only using budget resources, but also the donations of interested businessmen and foreign grants; in the future, along with an increase in the managerial competence of regional bodies in conditions of market competition, it will be possible to replenish these funds using regional bonds, but it should be noted that in some developed countries the issue of regional bonds has not yielded positive results). By assisting the development of production and increasing the number of jobs, the noted areas of regional policy will have an indirect effect on reducing the poverty level.
The institutional management system should be developed (state and private enterprises and the relations between them) in the regions and local municipal units. Following the example set by developed countries, the diversity of the state enterprise management system should grow, as well as the diversity of contracts, so that state and private enterprises can perform the work contracted by
THE CAUCASUS & GLOBALIZATION
state, regional, and municipal bodies.14 State, regional, and local tools must be applied to stimulate the establishment and development of enterprises in the region's cities. In so doing, the most efficient mechanisms must be chosen for stimulating the creation and development of large, medium, and small enterprises and increasing the interaction among them. Many people are talking about the need to stimulate the development of small and medium business, which in general is entirely legitimate. But today, after the collapse of the Soviet system, it has been impossible to stimulate the creation of large businesses, even on the basis of foreign high-tech production plants. Nor has it been possible to create a contemporary developed economy, ensure full employment of a high percent of the population, or promote a radical increase in export potential without a sufficient number of large production plants in the country. Even small developed countries such as Belgium, Finland, Norway, Denmark, Switzerland, Luxemburg, and Singapore have many large production plants that provide work for a large number of small and medium enterprises and even individual businessmen on the basis of cooperative relations. Georgia also needs to stimulate the establishment of cooperatives in agriculture (primarily by granting privileged loans to purchase machinery and carry out field work). In addition to this, due to the appearance of intensive and efficient technology for manufacturing environmentally pure products in small businesses and the need to provide full employment in the villages, the creation of small businesses must also be stimulated by creating specialized auxiliary organizations and companies and issuing subsidies to small businessmen, following the example of developed countries.
At the regional level, great attention is being paid to institutional relations (tools) being developed on the basis of a dialog and entering contracts, first, between regional administration bodies and businessmen and, second, among regional bodies, trade unions, and businessmen. The market coordination mechanism also envisages, within the limits of the law, establishing average or fixed prices for certain groups of commodities in certain markets for certain periods of time (one week, two weeks, etc.).15 This practice should promote complete sale of the products manufactured, particularly their purchase by the poor strata of the population (the latter applies in particular to the sale of food products).
The development of regional centers of gravity should be boosted as follows: by means of funding, mainly from territorial budgets; building municipal infrastructure facilities that private businessmen do not want to tackle (for example, private businessmen are very willing to take on transport servicing, but more often than not do not want to build roads, what is more, facilities of strategic importance, such as railroads and other transportation routes, should not be in the control of private businessmen); and promoting fiscal and financial stimulation of the establishment and functioning of enterprises of the real sector and enterprises, organizations, and funds assisting the establishment and functioning of enterprises and production units in the real sector (including in rural areas).
As mentioned above, the real sector of the economy (both in rural and urban areas) cannot be developed without the help of the corresponding auxiliary organizations and enterprises. The functioning of such institutions and enterprises should be stimulated by means of awareness campaigns and advertizing, using fiscal and financial benefits when necessary and with the help of investment and other regional funds. The most important facilities promoting the development of the country's economy, for example, plant-cultivating and cattle-breeding stations, can remain in state ownership for the time being.16 If the need to purchase the products of such enterprises is effectively advertized, the
14 See: M. Deriabina, "Gosudarstvennoe i chastnoe partnerstvo: teoriia i praktika," Voprosy ekonomiki, No. 8, 2008, p. 64; M. Klinova, "Globalizatsiia i infrastruktura: novye tendentsii vo vzaimootnosheniiakh gosudarstva i biznesa," Voprosy ekonomiki, No. 8, 2008, p. 79; I. Smotritskaia, S. Chernykh, "Institut kontraktnykh otnoshenii na rynke gosudarstvennykh zakazov," Voprosy ekonomiki, No. 8, 2008, pp. 110, 111, 117.
15 See: V. Manevich, "O zakonomernostiakh stanovleniia rynka," Voprosy ekonomiki, No. 3, 1993, p. 109.
16 Of course, such enterprises should largely exist in the private sector, but because market relations in rural areas are imperfect at present, private farms of the corresponding profile will not be profitable, while in developed countries, such farms operate at a significant profit.
THE CAUCASUS & GLOBALIZATION
state will not lose. For example, the production of high quality apples has abruptly dropped recently, and instances of the cultivation of poor-quality grapes have become more frequent. So potential buyers of the products of plant-cultivating and cattle-breeding enterprises should be encouraged by advertizing, marketing, and other awareness campaigns.
Ways to stimulate the introduction of elements of the latest technological system must be included in the regional development stimulation mechanism. At present, elements of the fifth technological mode dominate in developed countries, but technology that applies to the sixth technological mode is enjoying increasingly wider use.17
We believe that certain production plants characteristic of the new technological mode can be created at the regional level in regional centers of gravity. It would be more expedient to incorporate (borrow) the new technology already being used in developed countries, keeping in mind that problems with selling products manufactured using the new technology will not arise either in the domestic or foreign markets. There are three main ways to introduce such technology at regional centers of gravity.
> The first way is for local businessmen to buy licensed technology. This requires that the country has corresponding auxiliary centers for assisting the assimilation of this technology, while the region has trained highly qualified specialists and workers for ensuring its application. To stimulate the creation and establishment of such enterprises, the regional government must use fiscal and financial tools, including accelerated amortization, declare the corresponding branch a priority, and incorporate national stimulation tools, including the financial support of export for some branches (for which this is envisaged). Marketing assistance is also necessary, particularly for selling products abroad.
> The second way, the most promising, is to draw transnational enterprises into the regional centers of gravity. In this case, in addition to the usual fiscal methods of stimulation, corporations must become interested in relatively cheap cooperation with local enterprises based on the use of outsourcing.
> The third way is to use franchising mechanisms.
New technology must be used in rural areas in plant-cultivating and cattle-breeding enterprises, as well as to increase soil fertility, and so on. Moreover, Georgia has unique technology for manufacturing fruit, particularly apples and grapes (for example, Rkatsiteli Rose), which, if reanimated, could easily be incorporated into the contemporary technological mode.
Stimulating production diversification in the cities is more expedient for those commodities for which there is an increase in demand in the international and domestic markets. This does not mean that traditional branches should be forgotten (manufacture in which has been reduced essentially to naught as a result of the post-Soviet economic landslide), such as the manufacture of fabric, furniture, footwear, and so on, for which there is a natural raw material base. During diversification in rural areas, the main attention must be focused on branches that are of great significance for the country's food safety, as well as on those that have significant export potential.
Decentralization of Public Administration
In order to intensify the role of territorial administration bodies in coordinating socioeconomic development within the corresponding territorial units, decentralization of state and public administra-
17 See: S. Glaziev, "Mirovoi ekonomichesky krizis kak protsess smeny tekhnologicheskikh ukladov," Voprosy ekonomiki, No. 3, 2009, p. 31.
THE CAUCASUS & GLOBALIZATION
tion must be carried out within acceptable limits. But sometimes, decentralization tasks are not understood correctly. For example, transfer of the parliament from Tbilisi to Kutaisi was justified by the need to decentralize, which, of course, is not correct, since the country's parliament is a central state body. In reality, however, within the state sector, decentralization entails transferring some functions and powers from the central administration bodies to the self-administration bodies of territorial units (regional and local), that is, increasing the powers of the lower administration bodies at the expense of the higher.
Decentralization in the public sector could also mean delegating decision-making or administrative powers and functions from state and local bodies to private organizations, for example, housing associations or municipal service enterprises, and extending the functions and powers of regional and local administration bodies for coordinating the development and functioning of enterprises of general (that is, noncommercial) branches (either by transferring some functions or part of them from a higher body, or by introducing a new function).
Trends, rates, and level of decentralization. Gradual decentralization of administration and transfer of an increasingly large number of state functions to territorial units (regional and local bodies) is the primary trend in the evolution of public administration in contemporary states.18 Moreover, in the second half of the 20th century, there were periods in many developed countries when decentralization went quite quickly and fundamentally, followed by periods of relatively little change due to the situation that developed. For example, widespread decentralization occurred in France in the 1970s, after which the functions and powers introduced were officially enforced in the Law on Decentralization. 19 In the post-socialist countries of Central Europe, decentralization started at the beginning of the 1990s and, as of today, a sufficient number of contemporary models have been created in them.20 But in most post-Soviet countries, including in Georgia, intensive decentralization has still not ended. So when carrying out corresponding measures, Georgia must be guided by the experience of developed countries in this process and in establishing the suitable level of decentralization. Recently, a certain shift has been designated in Georgia in this matter. For example, on 21 February, 2013, the government of Georgia approved a document called "The Main Principles of Government Strategy for Decentralization and the Development of Self-Government for 2013-2014, "which was brought up for public discussion.
When carrying out decentralization and defining the level of decentralization (as when defining the powers ofdifferent ranks of territorial bodies, primarily in mobilizing a financial base and disposing of it, as well as from the viewpoint of the list offunctions being used and methods for coordinating them), developed countries are acting in the interest of raising economic efficiency, strengthening social justice, and ensuring macroeconomic stability.
Decentralization goals. The experience of developed countries shows that the main goals of decentralization are the following: dividing and distributing powers among the central, regional, and local levels of state public administration institutions, in which mechanisms have been installed that ensure the maximum protection of the population's interests; raising the efficient use of budget funds of territorial units; improving mechanisms for disposing of, financing, and managing the infrastructure (municipal and communicational) of underdeveloped and depressive regions and local units, as well as mechanisms for regulating the development of general branches (program coordination, fiscal and financial stimulation methods, subsidizing); establishing an effective mechanism for stimulating the development of small and medium towns and supporting their formation as full-fledged territorial socioeconomic centers (centers of gravity); and improving mechanisms for regulating the develop-
18 See: E. Baratashvili, Sh. Veshpidze, Regional Economic Policy, Tbilisi, 2002, p. 111 (in Georgian).
19 See: Ibid., pp. 102-103.
20 See, for example: "Sovremennye finansovye modeli detsentralizatsii publichnoi vlasti: opyt Slovakii," 2012, available at [yourlib.net/content/view/7446/87/], and others.
THE CAUCASUS & GLOBALIZATION
ment and industrialization of agricultural territorial units (in particular, improving municipal services in the villages, land recultivation, and so on). At the same time, some developed countries are focusing their decentralization efforts on preventing a buildup of people and industry in the largest cities and improving the mechanism for stimulating production diversification in mono-product cities, while many territorial units in post-Soviet countries are bent on increasing regulation that favors reconservation on a renewed technological base of many enterprises equipped with outmoded means of production.
At the current stage of Georgia's development, along with orientation toward the listed goals when carrying out decentralization measures, the administration bodies of regional and local territorial units need to concentrate on dealing with the high unemployment rate in Georgia's rural areas, which is continuing to rise due to more intensive farming techniques. This is causing an urgent need for rapid economic development of regional cities, primarily regional centers (so that some of the rural population can migrate to these cities in order to ensure real employment). The regional authorities must have corresponding powers and functions in order to develop the infrastructure to support these centers. In order for regional centers of gravity to become more appealing for business development, the regional authorities must have the tools they need to organize business development, stimulate it, and, when necessary, support it.
Fiscal (budget) decentralization schemes. There are two main alternative budget decentralization schemes in the world: French and German. The budget systems of these countries are mixed versions with the primary use of elements of a particular alternative scheme. In the French system, the territorial (departmental and communal) budgets are replenished largely by higher-budget transfers called subsidies and donations (in the regions, when necessary, funds are mobilized from the central and lower territorial budgets). Funds received from local taxes and dues comprise a relatively smaller part of the territorial (departmental and communal) budgets. In Germany, on the other hand, assignations are carried out according to fixed rates from the main state taxes (income, corporate profit tax, and value added tax at the middle (lands) and lower (communes) levels from funds mobilized in corresponding territorial units, whereby the rates are sometimes, although relatively rarely, legislatively revised. The role of transfers from the center is relatively insignificant. Financial aid is also transferred from relatively "wealthy" lands to relatively "underdeveloped" ones. Although after accession of the relatively underdeveloped lands of Eastern Germany, financial aid was more actively transferred to them from the central budget. The advantage of the first scheme is that it is easier in a centralized way to redistribute income from "wealthier" territorial units to "poorer," underdeveloped, or depressive territorial units. The main advantage of the second scheme is that the interest in regional and local administration bodies in production and business development in the territory under their control increases, which prompts them to make active use of the corresponding mechanisms for stimulating production. We think that the current situation in Georgia calls for applying the first type of model (due to the great differences in level of economic development of the regions), later switching to a mixed version as circumstances dictate.
Current trends in increasing regional and local production coordination in the general private sector. Another decentralization trend is for the administration bodies of territorial units to develop a general (that is, noncommercial) private business support system. The implementation of priority state business development plans is being stimulated in different countries at regional and local levels, and regional and local initiatives are appearing to support and reinforce industrial structures. Territorial administration bodies and branch associations of the private sector are participating in creating business incubators, innovation centers, investment funds, and advance training centers, stimulating the founding and development of small and medium enterprises, etc., designating conditions for creating industrial zones, and boosting their establishment, and so on. The implementation of such measures became systematic back in the 1970s in France on the basis of so-called planned contracts and other
THE CAUCASUS & GLOBALIZATION
mechanisms and were spread in one way or another in many countries. In our view, it would be expedient to gradually implement corresponding measures in Georgia too.
Most urgent decentralization measures in Georgia. Despite several positive aspects, Georgia's budget and tax system, as well as its legislative and legal regulation (based on the main legal documents) of functions performed at the territorial levels, requires further improvement. With respect to decentralization matters, this is primarily manifested in the following:
—the functions and powers of the regional authorities are not enforced at the regional (territorial) level either legislatively or by government documents, nor does the regional level have its own financial base (budget). It appears that positive changes will occur in the next few years, particularly since a corresponding conception, as shown above, has been approved at the government level. Moreover, in our opinion, there is no need to create a special deputy corps at the regional level (the members of which operate on a full-time basis), only a council (the members of which remain engaged in their jobs), which will make decisions within its competence, as well as a small executive body that will be responsible for financial and other economic issues and participate in drawing up an economic and social development strategy for the region under its control;
—the share of own income in the local (municipal) budgets is low. Corresponding measures must be drawn up and decisions made in this respect.
Conclusion
The system that currently exists for drawing up economic and social development strategy for the Georgian regions and elaborating a mechanism for coordinating this development does not correspond to current demands, which is making it difficult to ensure fuller and more efficient tapping of the country's potential and reach higher economic growth rates.
In our view, the Ministry of Regional Development and Infrastructure, regional administration bodies (after establishing contemporary decentralization standards and regional, that is, territorial power institutions), and corresponding scientific research organizations must pool their efforts to draw up a regional economic and social development strategy that meets current conditions and is validated, keeping in mind the need for deeper integration into the globalized world economic system and rational use of the opportunities presented by globalization at the regional administration level. The strategy should designate in particular the vectors of business development broken down into regions, ways to diversify regional production, ways to develop regional centers of gravity, and so on, as well as possible approaches to stimulating and supporting this development.
In order to improve the coordination and regulation of regional economic and social development in the next few years, a sufficiently decentralized system must be drawn up based on the experience of the developed countries and keeping in mind Georgia's specifics and the special features of the transition period. This also requires enhancing the system for assisting the development and functioning of business, introducing it cautiously and, where possible, gradually (although the critical state of agriculture makes such gradualness impossible).
