On the Question of Georgia’s Economic Development Strategy

Ineza Gagnidze, Associate professor Faculty of Economics and Business Tbilisi State University

Under conditions of the open economy transition to the market system, obtaining global market niche and taking a solid position there require a great effort of governments and citizens of any country.

Resolution of such a difficult problem needs a great endevour in Georgia.
Generally, peculiarities of a country, level of development, initial conditions, traditions, the degree of market mentality, progressiveness of economic theory, innovativeness, preparedness of economists and politicians, the degree of public support for the reforms has a great influence on the direction of reforms.
Several economic reforms took place in post soviet Georgia., but they were unsystemic. Unfortunately, the trend is partly maintained today. The country does not have a proper integrated strategy in terms of the government program of sustainable and safe development. This can be explained by unsystemic, fragmented character of thinking and activities. We think that such a management style should be promptly transformed into governing the country as a whole.
By this we mean elaboration of such a development strategy, which will combine political and economic development goals and interests of Georgia. Only the government policy, which creates favourable environment for companies to obtain competitive advantages can be successful.
Various authors have various viewpoints on competitive advantages and competitiveness of countries . R. Nelson distinguished 3 basic approaches: microeconimc, macroeconomic and the approach supporting for the industrial policy of active intervention into the economy by means of subsidizing. J. A Hurt provides 6 main conceptions, which in international economic literature explain the changes in competitiveness: microeconomic, governmental approach, neocorporate, coalition, cultural and social governmental. S. D. Cowen provides 7 conceptions determining competitiveness of the USA. [3; 18-19].
As the goals and governing methods of developed countries are different from the recipes needed in newly emerged economies, so called “outdated approaches” rejected by well known experts may appear very useful for Georgia. Japanese life long employment practice, which has come since feudal period may serve as a good example. It is known that it was rejected by foreign experts invited to provide advice on the development of Japan after the II World War. Willingness of the Japanese to implement the practice did not hindered them to achieve a great success. However none of the management systems are universal, including the Japanese management methods.
Competitiveness of a country is a result of combination of its orgazational model and management practices, which are the most acceptable for certain countries and competitiveness sources of certain industries.
Differences in national values, culture, economic structure, functioning organizations and development history make contribution to obtaining competitive advantages. [1; 162]
So that the economic development strategy be consistent under new circumstances, at the first stage it is necessary to determine the main international functions of a country. According to them we can distinguish the industries, in which Georgia can achieve competitive advantages.
A country cannot be competitive in all industries or even in the majority of industries. There are considerable differences between the competitiveness structures of any country. Certain countries attain competitiveness because under certain circumstances their internal conditions may appear to be better, more dynamic and prospective compared to other countries. [1; 162]
Because of the above we would like to draw the reader’s attention to the cluster conception discussed in “Competitive Advantage of Nations”(1990) by M. Porter, one of the researchers of competitiveness theory. The author analyzed four year research outcomes conducted in ten countries (their total export accounted 50% of the world export) with the support of 30 local scientists. He provided competitiveness factor analysis (diamond rule) and developed cluster theory.
Cluster conception is a new means of viewing the economy. It points out about the new role of companies, governments and other organizations in striving for competitive advantages. “In the global economy the most important competitive advantages are often originated from clusters” [1; 275]
Globalization enables companies to obtain capital, goods and technologies from any location and produce where it is the most cost efficient. Due to globalization processes the reasons for cluster creation has somehow reduced. Although under conditions of more and more severe competition based on scientific knowledge and dynamic economy, a new role of clusters has emerged.
Culster of industrial group represents a group of geographically neighbouring interconnected companies and related organizations, which act within a certain industry and are characterized by unity of activities and mutual supplement.
Clusters often include the supply firms, supplimentary product producers working directly with consumers; specialized infrastructure suppliers; governmental and other agencies, which provide specialized learning, education, information obtaining, research and technical support (such as Universities, professional development organizations); organizations elaborating standards.
Adequate policy directed to the development of clusters should rely on the development of existing or emerging industries, which have already been tested by the market.
Proceeding form the above and taking into account the interests of Georgia’s economic development, we can consider formation of clusters, such as: transport (due to geographical location of the country this function has already been recognized by Silk Road: railway, main line, air, pipeline, ) tourism (eco-tourism, recreational and rezort tourism, pilgrimage, etc), division of subcluster (timber, wine-making, vine growing, gardening, and other food products) within a large agricultural cluster.
In order to simplify the discussion we provide the example of California wine-maker cluster (scheme 1) [1; 209]. It will be especially interesting for the country, where 2 wine making methods of 3 basic in the world, originated.
Scheme #1 clearly shows that California group of wine makers comprises not only wine producing, but also a wide range of related industries, which provide support for both wine production and vine growing. In the vine growing plan we can see strong ties, which are common to clusters, with both California restaurant industry and food production (supplementary products) and tourism cluster in Napy. Special committees of California Senate and Assembly and California University in Davis with its well known vine growing program are also engaged.
Why should we consider the economy through cluster prism and not in terms of companies, branches, sectors and groupings? Fisrt of all because clusters better adjust to competition character and sources of competitive advantages.
Cluster is a form of network within geographic regions, where closeness of firm and organization locations provides a certain form of unity and increases the frequency and power of interrelations. Cluster encourages productivity not only through purchases and deliveries of production factors, but also through mutual supplement between the types of activities of cluster participants.
The most obvious form of mutual supplement can be seen in products. The wine makers’ cluster on scheme 1 is related to tourism cluster. The reason is that the quality of visitors’ impressions in tourism business depends not only on the supply of the products offered to them (for ex. beach or historical sights) , but also on the quality of hotel services and comfort in the region, restaurant services, safety, training and security services, medical services, insurance companies, quality and accessibility of souvenirs, conditions of airports and transport infrastructure, readiness of educational institutions, etc.
Formation of tourism cluster in Georgia’s economy will be an incentive for the development of infrastructure and economic activities. Discussion of tourism as a single branch would be limited because tourism products are characterized by mutual supplement (tourism agencies, touroperators and tourist routes) and would not be so efficient as management of this field through tourism cluster (conducting activities in the above mentioned direction).
Other reasons of mutual supplement within the cluster are related to the best planning and identifying sequence of activities. For example, in timber production cluster productivity of saw mills depends on the smooth supply of high quality timber and maximal use of wood either in furniture production ( the highest quality), packages and boxes (realtively low quality) or sticks and small items (the lowest quality).
In Georgia management of timber industry only by alienation is not effective. It will shift the competitive advantages abroad that could be created in our country. Discussing the industry as a cluster may help formation of new branches, such as paper and cellulose production, chemical means of paper production, paints, cardboard and packaging paper, re-processing, pinting paper production, napkins and sanitary material production, as well as construction materials, souvenirs and toys, corks, engineering consulting, sawing machines, timber delivery, furniture production, relevant educational and research institutions, fairs and advertising services and numerous other branches which may emerge endgenously by deepening the cluster.
Under the circumstances on the basis of industry selection conducted by the government it is reasonable to attract foreign direct investments into certain fields of the cluster, give credit proviledges to others and at the micro level eliminate taxes on some business activities
Having created the critical mass of products necessary for competitive success in a certain field, cluster leads to the integrated mechanism of management at the state, regional and seperate city levels.
We welcome that the Minister of Agriculture rehabilitated irrigation system. If we look at the branch through cluster prism the necessity of effective organization of nursery and seminal industries will emerge. That could help to get the desired outcome several years earlier. Namely, changes in tax rates so as to encourage local business will enable to get double effect.
Cluster perfection policy is often changed. It takes clusters 10 or more years to attain real competitive advantage according to their historical experience – this is one of the reasons that governments (because of four year election term) are not interested in formation of clusters. Although when the experience of cluster formation is already known, a state’s purposeful effort can make desired results in much shorter period of time.
Except for the above we would like to provide additinal advantages of seeing the country’s economy through cluster prism. Namly:
· Cluster conception is based on a broader view of the competition for increased productivity between firms and regions;
· Clusters influence competition in three ways: 1. increase in productivity of the engaged industries and firms; 2. Improvement of innovativeness; 3. Stimulation of new business.
· Clusters represent driving force of export growth and FDI attraction, which is one of the primary tasks of the Georgian government.
· State and private investments aiming at improving operation of clusters provide advancmenet for many firms simultaneously. Famous firms get interested and a specific production chain is created;
· The majority of cluster participants are not direct competitors of each other. They simply serve different segments of an industry.
· In a viable cluster the initial critical mass of firms enhances self-strengthening process. Information is accumulated and special preparation begins in local institutions, research activities are conducted, infrastructure is developed and appropriate legal regulations are laid down. Becides, cluster becomes more conspicuous and its prestige rises.
· Cluster intersection (for example, intersection of timber cluster with printing and publishing, transport, construction and wine making clusters and at the city level with conference and restaurant clusters) show new impulses of their development which reduce business entry barriers.
· As soon as the cluster is formed, mutual support for every industry within the group will emerge.
· Producers or individuals with original ideas migrate to the growing cluster region. This will contribute to resolution of the problem of emigration from Georgia.
· Firms in the cluster can determine future development trends more quickly, than their competitor seperate firms;
· Clusters may facilitate the adaptation process of local firms with changing economic conditions. This additionally reduces the risks of local economy.
· Owing to cluster memebership the sense of ” civil commitment” makes firms go beyond narrow private interests. As a result effecient owner is shaped.
As a conclusion it should be mentioned, that as a rule economic renovation is hindered by powerful forces, which are originated not only from outdated competitiveness approaches, but also from present ”frozen” interests. Becides, we should remember that progress in the economy may be violated by the inaction, as well as the irrelevent perception and comprehension of necessary steps.
To summarize, the role of government in the economy is to elaborate and implement a clear, positive and long-term economic program or process of changes, which will mobilize the government, businesses, organizations and citizens, general economic situation as well as complete mass of local clusters.