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OEO-ECONOMICS
Rozeta ASATIANI
D.Sc. (Econ.), professor, Tbilisi Institute of Market Economy and Law
(Tbilisi, Georgia)
THE PHENOMENON OF GLOBALIZATION AND ITS INFLUENCE ON NATIONAL ECONOMIES (A Case Study of Georgia)
Abstract
This article examines the prerequisites for the rise of globalization and its development patterns, analyzes the positive effects of its influence on national economies, and draws attention to the specific adverse manifestations of this multifaceted process in small countries. In this connection, the author gives a general outline of the post-Soviet stage in the development of the Georgian economy, the events that have taken place in the country over the past 15 years, and the specific features of the advance toward a civil society in the context of globalization.
Globalization as a world process dating back to the 1960s was preceded by the “Keynesian Revolution,” which gave a boost to qualitatively new economic growth and paved the way for the democratization of ownership and for broad decolonization in the 1950s. Globalization was significantly accelerated by structural changes in the world on the basis of scientific and technological progress, followed by a transition from industrial to post-industrial society in the 1970s. In this respect, the end of the socialist era was also an imperative of the times, a kind of echo of globalization.
I n t r o d u c t i o n
The origin of any term is associated with certain circumstances: it comes into use only when there is a demand for it. The term “globalization” appeared in the 1980s, when the American economist Theodore Levitt first used it to define the fusion of markets in contrast to their “fragmentation”
(breakup). So, the term “globalization” initially had a purely economic content, but in the following few years it took on a much broader meaning as it spanned across all spheres of social life. In a collection entitled Globalization: Knowledge and Society, published in London in 1990, this term was already used to designate the unity of different countries and peoples, civilizations and cultures. Apart from Martin Albrow,1 the term “globalization” in the broad sense of the word was used that same year by the Japanese business strategist Kenichi Ohmae.2
Today globalization means unification (integration into a single system) of socioeconomic, political, cultural, scientific, technological and other processes at work in all countries and regions of the world in accordance with the requirements (norms, values, criteria, etc.) formulated by the U.S. and other major states of the Euro-Atlantic bloc.
The Origin of Globalization
Globalization came on the scene in the 1960s, although it must be admitted that this overarching process was preceded by the so-called “Keynesian Revolution,” which started in the 1940s and was considered to be a turning point for countries that found themselves in a difficult socioeconomic situation. This revolution gave a boost to new economic growth and promoted the transition of capitalism to a qualitatively new stage. A market economy emerged where the key role was no longer played by the owner of capital, but by the market. It was these open market relations that removed the stamp of “wildness” from capitalism and triggered the process of democratization of ownership and an advance toward its plurality, which played an important role in the rise of globalization. In the 1950s, this process was significantly accelerated by widespread decolonization, and also by structural changes in the world based on scientific and technological progress, primarily expressed in the priority development of the service sector. Economic development acquired a new quality. In the early 1970s, the transition from industrial to post-industrial society gave a new impetus to world development and accelerated the globalization process. The most important aspect of the qualitative leap in mankind’s evolution was that the economy was given a social orientation. The market, which arose in the distant past with the creation of a surplus product, assumed a totally new significance as the greatest achievement of civilization. Along with government regulation of the economy, for the first time in mankind’s existence the market developed into an effective economic mechanism. It should also be noted that during the crisis of the 1970s the switch to a floating exchange rate system entailed a liberalization of international financial markets. At the same time, the Uruguay Round of trade negotiations under the General Agreement on Tariffs and Trade led to greater openness of the world trading system, a sharp increase in international trade and a deepening of the globalization process.
All these events ushered in social transformations and had a positive effect on the formation of contemporary society, of a new social community, which helped to deepen humanization processes. By playing an active role in the social sphere, the state acquired the properties of a “welfare state.” The developed world accepted the challenges of the modern times, laying the foundations of a civil society. Compared to the past period in mankind’s development, this was a step forward and a major advance toward a higher social and, at the same time, a new world order. The “welfare state” policy brought into sharp focus the function of social protection of society, which came to be regarded as one of the main lines of economic stabilization, an essential prerequisite for the implementation of market principles.
1 See: M. Albrow, Introduction in Globalization: Knowledge and Society, Sage Publishing, London, 1990.
2 See: K. Ohmae, The Borderless World: Power and Strategy in the Interlinked Economy, Fontana Publishers, London, 1990.
It should be noted that a new impetus to globalization was given by the social cataclysms of the 1990s that culminated in the collapse of the “world socialist system” and brought the socialist era to an end.
This is precisely why it can be said that globalization, a key distinctive feature of the modern world, “determines the content of world politics.”3 In other words, the content of contemporary social life depends in large part on current global processes.
Globalization and the New World Order
Globalization has a causal relationship with the new world order and the creation of a civil society. Apart from bringing countries closer together and making them interdependent, it promotes and accelerates the creation of an open society in individual countries and destroys closed systems, totalitarian regimes and economies, helping to focus on partner relations and contributing to effective use of resources on a global scale, implementation of scientific achievements in the shortest possible time, dissemination of resource-saving and low-waste technologies, manifestation of intellectual capital, rapid development of the Internet and information industry, free movement of capital, especially greater mobility of financial capital, etc.
Whereas in industrial society the key development criterion was the accumulation of physical and financial capital, at the post-industrial stage the emphasis shifts to the accumulation of knowledge. The 21st century has offered the world a new model of economic development based on an innovative economy, where the main accent is on intellectual capital, information and communication technologies.
The fact that the 21st century has been recognized as an age of the knowledge-based society significantly changes the very foundation of national competitiveness. It becomes an objective need for any country. Competition in the West, as the main condition of national prosperity, is among the basic values of democratic society. National competitiveness is a key development indicator and determines each state’s place and role in the world economy. Today, national development strategy pivots on the question of a global approach to competition. Against the background of the globalization of competition, such national values as abundant natural resources, low interest rate, stable currency, cheap labor, etc., have a significant but not decisive influence on the country’s competitive advantages. Companies today seek to gain competitive advantages by implementing innovations. From 75% to 100% of production growth in the developed countries is achieved through the use of innovations.4
In contemporary foreign trade, the theory of comparative advantage is gradually giving way to the theory of competitive advantage of nations. The new theory has gone beyond the limits of an analysis of production costs and accentuates such values as quality, know-how, a modern market approach, new design, creation of new kinds of products, etc. A popular slogan in today’s world is: “Live down old products by new innovations.” Globalization of competition calls for new thinking on the part of companies. The revolution in information technology and the colossal progress in the transport sector have reduced production costs. Consequently, in the conditions of such a transformation there has been a change in the very nature of the economies of scale.
Globalization creates conditions for implementing the main idea of the 19th century: free trade. Transnational companies and world capital markets free business from political constraints, giving increasing freedom to market forces.
3 Z. Davitashvili, Nationalism and Globalization, Metsniereba Publishers, Tbilisi, 2003, p. 189 (in Georgian).
4 [http://www.chelt.ru/2001/12/uzbasbashianz-12.html].
So, globalization is essentially universal. That is why, considering its scale and functions, it is very important to understand the extent to which this phenomenon, multifaceted and full of contradictions as it is, will be governable, because otherwise globalization can do great harm to the whole of mankind.
In view of the above, one of the main tasks of development in today’s world is combination and integration of global and local processes. This requires a transition from confrontation (accusing finger principle) to compromise (thumb principle), due regard for national peculiarities in the global division of labor, optimization of the balance between market and nonmarket relations and institutions, etc. The formulation of a strategy of sustainable and safe development for various regions and countries is of particular importance.
Negative Globalization Trends
The current globalization, along with many positive results, has certain negative consequences as well. The latter pose a threat, especially to small regions, countries and nations, and have an adverse effect on local cultures. In this sense, the Caucasian region, its countries and peoples are no exception.
Today, in conditions of global constraints, it is impossible to pursue an independent strategy in managing national economies. Newly independent states are even less autonomous, particularly when it comes to exercising exclusive control over social and economic processes and preserving national peculiarities and traditions. World processes are increasingly in conflict with the national cultures of small countries. Nation-states today are regarded as municipalities of the global system.5 In spite of this, the leading states have a dominant position in the matter of determining the world economic order.
The world economy is increasingly institutionalized. A significant part of political decisionmaking at the global level is controlled by global organizations, international agencies, trading blocs and major powers.
Market openness today depends in large part on the economic policy of the United States. U.S. hegemony is connected with the creation of the Bretton Woods system and is multidimensional. At present, the American economy is the largest economy in the world and the main source of global demand. Although U.S. monetary policy cannot function independently, the American dollar nevertheless remains the key medium of exchange in world trade. Neither the European Union nor Japan are able to perform this role. That is why the United States is so far unmatched by any of its rivals and remains the guarantor of the free world trading system, protecting it from politically motivated fragmentation.
National policy today is contested by world market forces, which have much more influence than even the strongest states. National policy can no longer exert particular pressure on economic and social results. Consequently, the functions of effective national economic governance are narrowing sharply, while the internationalization of business activity is proceeding apace. States are taking the path of transition from autocratic to democratic forms of government. Given the general recognition of democracy as a universal ideology, undemocratic regimes are seen as a sign of chronic economic backwardness.
The view that the Keynesian era has come to an end6 is supported by current events in the world. This is particularly evident in transition economy countries. The socioeconomic processes at work in
5 See: K. Ohmae, “The Rise of the Region State,” Foreign Affairs, Spring 1993, pp. 78-87.
6 See: P.Q. Hirst, G. Thomson, Globalization in Question: The International Economy and the Possibilities of Governance, Polity Press, Cambridge, UK, 2000.
the Caucasian region are a case in point. Such reformist strategies as full employment, training of low-skilled labor on a massive scale, etc., are inexorably becoming a thing of the past.
It is known that investments and financial flows are concentrated in the developed countries, while countries of the developing world, including those of the Caucasus, are still short of investment. An inability to attract finance limits the inflow of investment. In civilized countries, a well-developed banking system operates effectively in a stable financial environment, whereas in transition countries (including those of the Caucasus) with poorly developed financial systems the banking sector is subjected to speculative pressure, which prevents the creation of a healthy investment environment. Besides, as we find from world practice, a significant role in the success of innovative business is played by small firms. This trend appeared in the 1980s and is now well-established. It is promoted by purposeful government policy in the developed countries, as expressed in measures to upgrade legal regulation, provision of concessional loans, conclusion of contracts and use of other economic instruments. Such practices in promoting small business, approved throughout the world, have not yet taken firm root in the Caucasian countries (although some concrete steps have been taken in this direction), and this is reflected in low living standards. The middle class has not yet taken shape and the poverty rate is very high.
In the efforts to stimulate innovation processes, special importance is currently attached to venture financing. Venture firms are set up with the participation of banks, pension funds, insurance companies, etc., while venture capital is used to finance R&D projects and inventions. This advanced experience is just as inadequately implemented in the Caucasian region.
All these and other factors worsen the investment climate, which leads to a low level of business activity and high unemployment.
We fully agree with the idea expressed by Michael Porter,7 a well-known student of competition theory, that a country’s “competitive advantage is created at home,” in the domestic market, and not in foreign markets. It is this undeveloped domestic market, both in the post-Soviet space in general and in the Caucasian countries in particular, that impedes the transition to a market economy and in effect fosters “wild capitalism.” For the civilized world, this is a long-past and very painful stage, which is now part of the history of the developed countries.
So, the globalization process at the beginning of the third millennium is sharply differentiated and marked by internal contradictions, for the most part manifested in transition economies. Naturally, it cannot develop according to a single model, whether American or European, Japanese or Chinese. Globalization is characterized by general patterns which have their specific manifestations, depending on the peculiarities of governance, not only in different regions, but also in individual countries.
In this context, we will try to examine in broad outline the economy of Georgia, a Caucasian country which, despite its small size and numerous complicated problems, has attracted the attention of the world community by its originality.
Georgia in the Context of Globalization
After the disintegration of the quasi-socialist system, Georgia, together with other post-socialist states, joined the world globalization process and was naturally faced with totally new tasks.
The Georgian Republic is a transition country whose geopolitical position turns it into a bridge between the countries of the West and Central Asia. That is why it seeks to occupy its own place in the globalization process in line with its geopolitical strategy. This is confirmed, among other things, by
7 See: M.E. Porter, On Competition, Harvard Business School Press, 1998, p. 194.
the fact that the groundwork has already been laid for implementing such projects as the Europe-Cau-casus-Asia transport corridor (TRACECA Program), the trans-Caucasus oil pipeline (Baku-Tbilisi-Ceyhan and Baku-Tbilisi-Supsa), economic cooperation between the Black Sea countries (BSEC), and the construction of a trans-Caucasus gas pipeline. Georgia is among the authors and participants of a historic project of global importance: the Great Silk Road. These projects are a significant factor in deepening interstate relations and will help to extend Georgia’s economic and cultural cooperation with the outside world. The republic was among the first post-Soviet states to join the Partnership for Peace (in 1994) and other programs of cooperation with NATO.
Georgia is interesting and attractive in view of its natural resources and its rich economic potential. The country is unique in the diversity of its natural resources and is particularly well-endowed with energy resources (although only a small part of them is currently utilized). A big role in the country’s energy balance is played by “white coal” (hydropower). Georgia has numerous deposits of diverse mineral resources, including fuel and energy materials (coal, oil, brown coal, peat), ferrous and nonferrous metals (iron, manganese, copper, lead, zinc, arsenic, mercury, antimony), chemical feedstock (andesite, barite, bentonitic clay, diatomite, talc, serpentinite) and nonmetallic minerals (agate, basalt, granite, marble, tuff, fireclay, cement, brick clay, etc.). Thermal and fresh underground waters have a significant place among the country’s mineral wealth.
Georgia has a wide variety of mineral waters. Its abundant recreational resources suitable for spa treatment of all kinds of diseases create ample opportunities for the development of health care and tourism:
(1) Rich hydromineral resources. Georgia has over 1,300 mineral springs with a daily output of 130 million liters;
(2) Healthy climate. Coupled with mineral waters, the medicinal properties of Georgia’s maritime and mountain climate result in a wide range of health resorts. The country has 102 resorts and 340 resort areas, many of them unique. For example, Tskhaltubo mineral water has no parallel in the world. Water similar to Borjomi is found only in France and is known under the name of Vichy. (But Borjomi water, in contrast to Vichy, contains small quantities of sulfates, so that it tastes much better.8) In terms of kidney disease treatment, Arkhi-loskalo rivals the world-famous resort of Bayram Ali (Turkmenistan), while Abastumani is often compared with Davos (Switzerland). One of the best Georgian spas is Sairme with its mineral and thermal waters. Bakuriani (located 2,000 meters above sea level) is famous for its mountaineering opportunities. Gudauri should also be mentioned in this context. In addition, Georgia has natural advantages for the development of such resorts as Shovi, Utsera, Bakhmaro, Mendzhi, Lebarde, Avadkhara (1,500-2,000 meters above sea level), Zekari, Amagleba, Kvereti, Lashichala, Surami, Nabeglavi, Nunisi, Tsaishi and others;
(3) Therapeutic muds (Akhtala), contrasting nature and picturesque landscapes;
(4) Diverse natural sights. Georgia has about 100 caves, whose microclimate can be used to treat various diseases;
(5) Numerous ancient cultural monuments and ethnographic peculiarities, ranging from na-tional-style buildings and structures to Georgia’s unique national cuisine.
All of this makes a significant part of Georgian territory recreationally attractive. Moreover, each recreation area has its own diverse sectoral structure and its own specialization.
The development of the health-resort and recreation industry is seen in the republic as a longterm priority area designed to promote international economic and cultural relations and help to take advantage of the positive aspects of globalization.
8 See: R. Asatiani, N. Khatiashvili, “Health Resorts are Our Asset,” Komentari, No. 4, 2005 (in Georgian).
To what extent does Georgia’s current socioeconomic position meet the challenges of globalization?
Despite its unique resources, Georgia remains a less developed country because of its embryonic economic relations and integration processes. This circumstance once again warns us of the need to think over our responsibility for Georgia’s future. First of all, we should decide where we are going, what kind of economic system we are building and what kind of country we want to create.
The construction of a new economy in Georgia was to have laid the groundwork for a rise in living standards and the creation of a law-based system. Unfortunately, this has not happened. Instead of a socially oriented economy, the main problem in Georgia today is still man’s biological existence and the survival of the nation. Poor governance and a misguided economic policy undermined the economy. The authorities took little account of the requirements of the new world order and the construction of a civil society, with the result that Georgia found itself under a kind of repressive regime. It is common knowledge that business does not seek to protect such universal values as freedom, the rule of law, etc. For their protection, countries create new institutions which are undoubtedly among the benefits gained from globalization. Georgia, among others, created such institutions with significant assistance from international organizations, but since the authorities at that time lacked political will, no further progress was made. That is why the step forward taken by Georgia in the early 1990s was followed by two steps back. As a result, the Soviet monopoly based on the slogan of social justice gave way to a capitalist monopoly based on the interests of clans, with a catastrophic reduction in the responsibility of government agencies. National interests were subordinated to the interests of certain individuals.
Property in Georgia was denationalized, but this process did not lead to success in economic growth. A tight fiscal policy, reflected in rising taxes and cuts in government social spending, and a “dear money” policy designed to curb spiraling inflation resulted in extremely low business activity in the country and caused a decline in aggregate demand, which entailed a reduction in the tax base. Concessional loans and grants were misspent; this was coupled with misuse of budget funds, corruption, accounting irregularities, nepotism, etc. The well-tried Keynesian multiplier theory was ignored; by contrast, the decline in consumer demand had a negative effect on market size and led to a sharp drop in production, employment, income and investment activity. This was followed by a paralysis of the clearing system, a deepening payments crisis, a flight of capital and a “brain drain” from the country, etc. At the same time, the hidden economy reached an unprecedented scale, exceeding 70% in some sectors. In addition, smuggled goods that streamed into the country were sold at dumping prices, dealing a severe blow to national production, fettered as it was. Pseudo innovations and imports of outdated resource- and energy-intensive technologies, and also food products and pharmaceuticals hazardous to health were practiced on a massive scale. A low official monetization ratio (6-7%) and rapid dollarization (36%) generated negative trends, both monetary and fiscal, and had an adverse effect on the entire accounting system. The trade deficit became chronic, and natural resources made up a large part of exports. The persistent trade deficit had a negative effect on economic growth and worsened the country’s financial condition, while its external debt increased rapidly. Western credit “injections” helped to solve only the country’s acute short-term problems caused by the budget deficit, but Georgia found itself facing another huge problem: how to service its external debt.
Such was the general picture of the difficult socioeconomic situation in Georgia after 12 years of systemic reforms. That is why the Rose Revolution came, so to speak, as an expression of the need to protect the people’s constitutional rights. In our opinion, it was something of a response to globalization.
Now that the world is moving towards a civil society, sustainable economic growth and elimination of poverty are major priorities in achieving this goal. That is why in 2004, after a 12-year fiasco, Georgia embarked on a new stage of radical reforms. In these efforts, it has received significant support from TACIS (EU program of technical assistance to CIS countries), the project for a reform
of the business climate in Georgia (USAID), the U.N. Development Program, and others. These projects and programs pay special attention to public administration reform, public expenditure management, and improvements in the structure of Georgia’s judicial system. In the past three years, significant steps have been taken in this direction. Despite these efforts, Georgia is still faced with complicated socioeconomic problems. In conditions of extremely low demand, society is highly stratified and a substantial part of the population is isolated from business activity, especially from fast-track privatization processes. In terms of the Index of Economic Freedom, the republic is still among the lowest-ranking countries in the world. Regrettably, it is outranked by many less developed countries of Africa, South America and Asia. As regards the Human Development Index (for the first time reflected in the U.N. Development Program in 1990), in 1991 it was supplemented by average length of education (years of schooling), which provided the basis for a knowledge index. According to this index, which ranges from 0 to 100, countries are ranked as follows: with a score of 80 or more, as high-level, and with a score of less than 50, as low-level. Georgia was in the middle-level group with a score of 72.9. But during the ill-fated 12 years, it acquired the status of a developing country. So, these indicators are inconsistent with Georgia’s status.
In this context, I cannot pass over in silence the much-debated Bologna Declaration. This document provides for European integration in the matter of personnel training and, on this basis, recognition of specialists throughout the world.
The Bologna Process is very important in itself. Naturally, Georgia cannot remain on the sidelines, but we should also take into account that this process to some extent destroys the positive tra-ditions9 in the sphere of education and has a negative effect on national culture and on the country’s intellectual potential. That is why the Bologna Process has caused heated debates in Germany, Italy, France and Russia. Europe’s major universities have come out against it. They believe that the Bologna Process will lead to irreparable consequences, that it “bulldozes” not only education, but also each country’s culture, mentality and national traditions. Through copying, leveling and averaging, they believe, this phenomenon downgrades any above-average education.10
Georgia should take this competent opinion into account. It should preserve its state independence based on the development of its own culture, traditions and history; build a European civilization on national soil; make its own contribution to the political security of globalization; and help to cultivate and develop its positive effects in the country while avoiding its negative effects. The republic should not lose its originality or forget its roots, origins or traditions, which are the source of our originality.
C o n c l u s i o n
Globalization has a causal relationship with the creation of a new world order and a civil society. It accelerates the formation of open societies in individual countries and helps to develop intellectual capital and to implement resource-saving, information and communication technologies on a large scale.
Globalization is essentially universal, which is why it is important to understand how governable this contradictory phenomenon will be, because otherwise it can do great harm to the whole of mankind, posing a special threat to small countries and nations and having an adverse effect on local cultures, a process particularly pronounced in transition countries such as Georgia. Although this Caucasus republic has unique resources, in view of undeveloped economic relations and integration
9 See: Economic Trends in Georgia, Georgian-European Consultative Center for Economic Policy and Law, October 2006 (in Georgian).
10 V.A. Sadovnichiy, “Problemy postroenia obshchestva znanii v sovremennoi Rossii (mify, rify, perspektivy),”
Vestnik Rossiiskoi akademii estestvennykh nauk, No, 3, 2005, pp. 5-6.
processes it is confronted with complicated socioeconomic problems and faces difficulties in building a civil society and in meeting the requirements of the new world order. At the present stage of globalization, Georgia is building a European civilization on the basis of its specific national identity and is contributing to the creation of a new system of international relations.
Vakhtang BURDULI
D.Sc. (Econ.), department head at the P. Gugushvili Institute of Economics (Tbilisi, Georgia).
THE ROLE OF GLOBALIZATION IN REVIVING THE ECONOMY OF COUNTRIES IN TRANSITION (A Case Study of Georgia)
Abstract
The article analyzes the ways globalization is conducive to reviving technology and raising the product competitiveness and economic efficiency of a post-Soviet country (Georgia) during its transition to a market economy. With this goal in mind, the author looks at the reasons for the technological lag and decline in product quality in transition states during the pre-reform period. He goes on to substantiate, based on Professor V. Papava’s “theory of necroeco-nomics during the transition period,” the reasons why a “dead economy” exists during this period and why it gradually dwindles away and disappears completely as market relations develop. He justifies the need to
make use of such globalization factors as the movement of investments, innovations, and knowledge, the formation by transnational corporations in transition countries of enterprises engaged in the mass manufacture of the latest high-tech products, and so on, which is imperative for forming a market economy and raising its competitiveness. In the last section of the article, the author looks at the influence of the country’s active integration into the globalization processes on the increase in domestic goods turnover and product export, as well as on raising the efficiency of the economy and prosperity of the population in a state with a transition economy.
I n t r o d u c t i o n
For several years now, the world has been moving gradually into the era of globalization. This process is primarily reflected in the economy and economic relations in the rapid spread of technolo-
