Features of investment environment in Georgia under the globalization conditions of economics

Lamara Qoqiauri, D.E.S. Professor; Mzia Baramidze, acict. Professor

Short historical review. Any investment process is directed to satisfy the demands, the realization ability for such demands society already has, under the conditions of productive forces.

Our country has already sensed the reducing of industrial efficiency in the 90th years of the last century that has been deepened from year to year. The demand on the activation of investment process has been formed also by the national economical disproportion that was revealed in unbalancing of economy, inconsistency between monetary and natural flows.
But the lowering of profit of national economy, as the revealing of the inefficiency of economic mechanism, has multiplied this problem, their timely resolve became impossible. The state permanently had lack of necessary resources for economical growth and inevitably streamed to financial bankrupt. The demand on the activation of investment process has been sharpened.
Today, when the society makes a lot of efforts to the reformation of economics, the significance of demands on investment doesn’t reduce. But the low efficiency of our industry doesn’t give possibility for the realization of those demands. The low level of industrial incomes caused the tiny capital forming process. The aggregation index in state that is determined by the difference between the state investment and budget deficit had negative significance during 15 years. The great foreign debt is the most serious factor for the reducing of aggregate’s internal sources. Instead of the negotiation results on its restucturization, the annual expenditures for service approximately equals to the half – investment in the fixed capital. On those data basis experts deduced that under the existed tendency circumstances of development the perspectives of the state economic development has to been very doubtful. The situation has been changed only by the sharp increasing of investment actives on the private investment market, for this the radically improving of investment environment has to be necessary. But to remove the negative aspects of investment environment their primarily analyze has to be conducted. Only the revealing of investment activity suppression reasons may become the constructive basis in possibility searching for their elimination, that has determine the directions for the forming of favorable investment environment.
The unfavorable investment environment that has been connected to the reproduction peculiarities of our county was characterized by the following:
– Depletion of resource potential of investment process, caused by the low industrial profitability, the small savings of population and their incomplete transformation into investments;
– The increasing of demands on the sources of investment resources, connected with the transition to the expensive resource-saving technologies, that essentially higher the marked value of advanced capital.
– The deformations of economical growth, that prevent capital inflow, hamper to their entering into the industry. The high monopolization of industry activation of criminals, still high level of inflation, that reduces profitability of long term contributions belongs to them;
– Insufficiently developed of market economy that isn’t able to wholly provide the transition on market economy of purchasers;
– Staying in the economical downfall stage for a long period, that is the most unfavorable period for investments. The downfall reduced such low yield; commercial credit became inaccessible to refund even circulating assets that has been revealed in non-payment crisis.
The unfavorable investment climate has been worsened by the ongoing realization of subjects and objects of investment market that has been revealed in that:
– Privatization couldn’t form the efficient proprietors, that are the initiators of investment process;
– The nonmarket mentality of director corps has been established, that hopes that state would cover the industry debts and are oriented on the application of short term factors of development.
Let discuss the specifics of reproduction process, that unfavorable influenced on the investment environment, also determine the social-economical reasons of market entities toward investment activity.
Why did the current reproduction process create insufficient conditions for investment activity? To answer the given question it has to be necessary to recall that in order to realize investment process under population savings condition, their quantity has to be sufficient for capital expenditures. This means that the reproduction process gives possibility for provision more profits of existed demands, basis the saving opportunity in population. Then this savings were accumulated by commercial banks, got in security market and finally transformed in investments.
The beginning of economical reforms is connected with price liberation process that in considerable short period defaulted monetary assets of population. The purchaseability of national currency has been collapsed so sharply that savings of population have been actually vanished. The following condition has also promoted this situation that the population which had savings in saving banks has been prevented from the transformation into hard currency or valuable goods of their own savings, to protect private assets from inflation. The reason of this was the emergency monetary policy regime of government which declared that the population accounts have to be freeze.
Thus the accumulation process for the most of people had anew, began from nothing from 1992-1993, in such way that neither state, that was bankrupted toward GDP, because of budget deficit of more than 30% nor population had financial resources, that have to move investment forces in country.
According to the Statistical Department data, population savings at the end of 1990 consist 15% of GDP, but by the opinion of experts this quantity have to be little in 3times.
Besides in rapid economical growth period the most of countries had the high national norm of savings. Particularly population put aside 29% or more of incomes. The inadequate savings have been strengthened by financial crisis of 1998, for the reason that it caused reducing of also accumulated savings, because of lost of banking system capital.
But the most defects may be named that the population lost trust in banking and investing institutions, resulting in vanishing of desire to trust somebody their savings and finally put it into investment. The adversity of state was not only the deficit of savings but also their inefficiency application. Now the only 14% of savings may be considered as investment potential, this is the part that was spend on the deposit growth and purchasing of securities. Residual 86% of savings are kept home in most unindustrialized form, as foreign or national currency.
So the state economy became far from the ideal proportionality of equalization of savings and investments needed for economical growth that is described in manuals of economical theory.
The lack of savings reduces the crediting possibility of commercial banks, because the existed supply on money market hasn’t been full. So the country has the most insignificant crediting ability. Its value is less than the 10% of GDP. In developed countries this ratio reaches 100%.
Such circumstance has to be considered that saving process wasn’t the needed hamper factor of financial potential for investment. The created restrictions have to be too strict used in amortization resources for protection-saving of former investments. It is connected to that the central funding termination of capital expenditures involuntary unsettled the industry cumulated amortization funds, because the most of amortization resources part (about 70%) has been spend on centralized needs. Thus the resources to keep depreciated plant wouldn’t be sufficient. The expanding inflation depreciates them, and investment goods became expensive, that naturally sequestered possibilities of amortization fund as the investment sources in future.
Georgia became in the condition of financial shortage that is unfavorable for possibilities of investment process. Besides today the demands on resource potential have to be growth. The reason is the transition on new industrial model of development that is target on the reproduction intensive type, resource- saving technical progress, using of high technologies. For the transition on new industrial model the application of expensive resource -saving technologies is requested, that means the high level of saving in society. This matter undoubtedly increases obstacles for realization of investment process.
What peculiarities have characterized the investment crisis in Georgia? During the transition into new industrial model the offered requests for investment have stated by peculiarities of industry:
First. For present industry extension can’t and haven’t replicate level and quality of achieved industrial-technical potential, because under the conditions of spent potential of extensive development it makes industry unprofitable. The replication of achieved potential in such conditions increased inefficiency of industry and it haven’t be happened. It doesn’t respond to the new demands of economical growth, considered the transition into the high level of industrial development.
The new technological process development always contains industrial risks and is connected to the providing difficulties of commercial stability. This circumstance significantly has complicated the transition into the high level of development.
The specification of the transition into new step of our country is the necessity of replacing industrial technological system. In Kondratiev-Shumper “Long Wave” theory there are indicated the difficulties of this process, because it is connected with the replacement of old machinery because of its inexpediency. In this case industrial development neglects old technologies of industry and doesn’t improve them. As life shows new technological system can’t adjust to the old one, this is the difficulty of existed situation.
The development within the traditional technological system dives the possibility to improve its particular elements. At the same time, the renewed technique usually adjusts to the remained one in reproduction process. But while talking not about perfection of technique but replacing technology, then in industry there would be renewed not the separate blocks of industrial machinery but whole potential. The “Long Wave Theory” of D.Kondratiev and I.Shumper proves the conclusion that is actually for our reality.
Under the conditions of necessity of replacing technologies the raised sharp demands for investing process makes impossible their realization in short terms, because for the realization of such difficult problem the significant accumulation has to be needed, more over that the technical progress is characterized by high capital capacity.
Second. Georgian economic shows the conservatism of industry structures. Time for technological and industrial transformation hasn’t come yet. The reason of this unfavorable event is in the existed structure of industrial machinery, that from communism regime, inertial was directed on the big industrial structures and was based on them. It has been considered that big industries have advantages toward small ones, thus they are more perspective and they have to determine state development. As life shows such view turns out to be unilateral. In developed countries besides big industries there have been successfully developed small and middle ones. In developed counties about a half of national product and most of work places fall to their share. Such high level of small and middle scale business specific share caused the increasing of production assortment, employed population, created additional demands, and they created the motives for supply growth. Besides small industry have more possibilities for structural changes in comparison with big ones.
Third. The renewing of state main industrial funds didn’t carry out sufficiently quickly and for the end of 1996 the mean factual terms for their service consist 25-26 year. For the last period the situation hasn’t changed significantly because the crisis was lasting. The renewing of industry didn’t transform into mass phenomena. It was resulted particularly in that Georgia became as the buyer of raw materials and purchaser of all others in world market. All industrial sectors are practically noncompetitive. That means that the investment process request active foreign-economical activity, that opens world markets of investing goods and new technologies for our country.
Besides to purchase necessity great consignments of equipment need the application of state export potential, it activation into industrial unities and connection to the reproduction chain. For realization of such strategy the investing of large resources in creation of export infrastructure would be necessary: new pipelines, sea terminals and etc. By means of them our raw material complex would be given possibility to create the resources of such scale for other branches that provide their rapid development and access in world market. The state has to greatly support industry, for this it is necessary to fix high export duty, to protect noncompetitive products.
While maintain GEL rate the industry support means such protection measures, that were connected with fix of high export duty. This process would improve the isolation of our state economy from world market and essentially weak the introduction potential of new western technologies in the renewing of basic funds. It was resulting in reducing efficiency level of investment process.
We discus the objective conditions, that have loose effective economical growth of investment flows that suppress it. They are reduced on:
o Depletion of resource potential of investment process, connected with small savings of population and their incomplete transformation into investments;
o The increasing of demands on the sources of investment resources, connected with the transition to the expansive resource-saving technologies, conditioned by the transition on the new industrial model;
o Insufficient development of small and middle scaled business, where such resources have been used that aren’t requested in big industry;
o High demands on import technologies, their realization requests the widening of export industrial capacity. Georgian export potential isn’t able to satisfy those demands.
The result of economical crisis. The crisis has its own mechanisms that make practically impossible the realization process of favorable investment environment. The mass bankruptcy caused the shaking of healthy industry, because many of their partners can’t cash supply accounts. Thus the commercial risks increased during this period, resulting in reducing in business activity.
During recession industries incur losses. Because of this they can’t accumulate sources for investment, besides, because of worsening of expectation of market conjuncture vanishes the investment stimulus evening cases when financial resources are sufficient. The realization difficulties and unstable condition of industrial partners caused reducing of industry and consequently obtaining incomes. There emerged threat that investing resources couldn’t be redeemed. Thus the investment process is terminated and industries carry out “submarine” tactic, i.e. wait for good times for activation.
When crisis happens during landslide of prices, it is by accompanied mass bankruptcy because of simultaneous sequestration of industrial incomes. In this case crisis sanitary function begins action and cleans economy from ineffective industries. But if crisis is accompanied by rise in prices and inflation, then it is longed. Rising prices give possibility to ineffective industries, to compensate increased expenditures for a time. They are under threat of impoverishment, but are not among bankrupts. Bankrupt mechanism doesn’t vanish, but it lost dynamism. This matter not only longs crisis period, but deepened it till the depth of industrial collapse, that would happen in the result of devaluation of monetary capital.
Mentioned process makes industry to be unprofitable, turn business into mediatory activity. Really, speculative capital has more short cycle and has less risk of devaluation. This situation causes stable stagnation of industry, because the industry can’t realize not only the perfection but even simple reproduction. In this situation the ant stimulus of investment activity has been strengthened.
The described situation is typically for countries of market economy, that are in condition of stagflation or such crisis situation that is developed on the inflation background. Georgian specific is in unrealized massive closing of unprofitable industries.
The bankruptcy essentially happened as single a phenomenon, that doesn’t corresponds to the depth of recession. In such conditions the strategy of ineffective producers became nonpayment, as they considered it to be the short term measure for the solving of the industrial problems.
Industries that sink in nonpayment crisis physically aren’t able to perform the role of investor, because their real state doesn’t form the disposition to solve strategic problems. Their interests are limited by providing problem of current expenditures that is connected to the simple reproduction and the sparing industry to stop.
Thus the transition to the market finally is dictated by the spending of such abilities of state socialism that provided sufficient incomeability of economy and efficiency of investment mechanism on all levels of industry. But the stepping into market happens on the background of economic recession, when abovementioned negative processes have been permanently deepened. According to moderate calculations for the beginning of 1990 the 1/3 of single social product was the product that had no purchaser [1]. There exists idea that this quantity was more than half of state GDP [2]. The recession depth caused by the removing of excessive production was stipulated by accumulated disproportions. As I.Shumpeter noticed “crisis is potential shambles”. It avoids such industries that don’t satisfy demand, vanishes existed disproportions between single demand and supply. In other words promotes micro equilibrium. Besides it forms new proportions between branches that are based on resource replacement and varying of industry profile. Finally, it transports spare cash resources to the investment that leads country to overcome crisis situation. To realize this function those mechanisms are needed that provide resource mobility. But exactly this condition was absent in country at the beginning of reform, because the market infrastructure has been only created, the capital market was absent. New stock proprietors appeared together with privatization, i.e. not at once. But their activity on market stage hasn’t followed by desirable reaction on the changing of conjuncture conditions.
Consequently rearrangement of forces and resources has been delayed, that means the determination of the growth period of efficient economy.
It is insufficient to open wide road for the realization of investment process. Strong motivations are necessary, desires of proprietors to pass such hard way. The investment process will become inevitable only in case if desist from it form the danger of loosing of high incomes but the withdrawing from the market. Such circumstance is possible only when if economy has been realized on competitive market, from buyers market to purchasers market. But there doesn’t exist of any market yet in Georgia in complete type. In our market monopoly forces are strong, they prevent capital inflow, drag entering into branch. Besides such level of saturation by goods, when buyers struggle between each other for customers, to better satisfy their needs (exception banking market).
In industries for inevitable functioning of scientific-technical and investment processes isn’t sufficient the transition into market. From our opinion it is necessary to lead it to the next stage of development that means the emerging of competitive market. The competition isn’t between consumers- for purchasing- but between producers- to obtain advantage in selling their production. In competitive market those prodders survive that have more qualitative production or offer such novelty that has no analogue among competitors. Purchaser market creates competition of quality and novelty, became the source for renewing of productions and extension of assortment. Such market is functioning is cases if supply value realized by industry exceeds demand. Only in such case realize the customer the choice that is oriented on the production of high quality.
The competitive market is future plan for Georgia. Would all the spoken about competitive market mean that the state would passively wait for time when such market growth and flourishes, when the investment process emerges from inside and gradually form favorable investment environment.
Life shows that state leaving from economy actually promoted non-coordination of anarchies and economical processes. The state hasn’t leave from economy but on the base of economical instruments change regulation forms of national economy. The transition from planned economy couldn’t happen permanently by itself, instead of dismantling of previous administrative-ordering mechanism and active participation in creation of market infrastructure. State has to stipulate termination of objective obstacles of investment process, struggle against anomalies of economic growth and carry out prophylactic of their emerging.
We described the conditions that are connected with objective specifications of reproduction and complicate investing: low efficiency of reproduction that combine saving processes; development lack of markets that prohibit the possibility to actively pass toward competitive market.
But let stop at the obstacles that accompany investment process and are created by the subjects of market economy. Exactly they-subjects make investment decisions and became the conductors of investment process.
But for the realization of above mentioned the existence of market subjects are necessary. Their legal registration happened during privatization process. It carried out sharing of state property and led self-organization process of market subject. Privatization became as the condition of economical independency of industries, because it passed owner shipment on resources to the industries. While new owners legalized their rights, their possibilities wouldn’t spend on the long-term strategic problems and the spreading of investment process.
That means that privatization is the precondition of investment process. It created material basis for realization of economical initiative of industries, but couldn’t form simultaneously market behavior of state’s former economical structures. Their economical behavior has been formed during decades and created hard traditions of practical activity. Industries couldn’t form habits of changing of industrial structures and reaction on market signals. Their orientation has been determined by governmental orders and assignation of resources for their realization. Under the conditions of varying conjuncture the industrial managers couldn’t yet make independent economical decisions. They have still weakly reacted on the varying signals of market and don’t support changing of market programs correspondingly. Such inertial situation makes economy to lost required dynamism and delays technological novelties.
Nonmarket type of economical mentality of Director Corps, that is inherited from state socialism formed its as the agent of investment process conservative inertness of behavior. It reduces modernization possibilities of national economy. As for formation of market type mentality among our proprietors, it needs long period, and after its passing would transformed into permanent motive of perfection of investing realization of industry.
Nonmarket mentality is typically not for only manager structures but also for other members of industry. It was formed because of living in state socialism society for a multiyear, where economical strategy was formed at the national industrial level, and industries itself and workers had to perform their orders. Their behavior wasn’t connected to the match necessity of market structure. So while transmission to the market economy they are reveling inertness and keep previous type.
Nonmarket mentality defines not only passiveness of economical behavior of industrial members, and what is not less dangerous, the responsibility deficit of economical decisions. Society has been accustomed that it has no rights while relation with governmental structures, and on the other hand to the responsibility of those structures regulated aroused significant economical problems on all levels. Now the burden of economical risks and responsibilities has been transported from government to the proprietors and citizens. It has been turned out that society was not ready for such changes.
Director corps doesn’t hurry to change industrial profile and hopes on government, to save industry from bankruptcy.
Separate workers don’t look for substituted employment and wait that state would provide their employment according their specialty. On the other hand the persons which invested their own savings in high risky companies, claimed government to the losing of their savings in private financial organizations.
Here we discussed the specifications of reproduction process that don’t give realization possibilities to sufficient capital investments that are ready to solve national economical problems.
The formed difficulties on the way of favorable investment environment are too significant and don’t give hope of their improving. At the same time the illusion that everything would happen by its own way is too harmful.
The active regulating forces in type of state and banks have to take action, that are obliged to recognize the objective demands of general economical equilibrium of state and help out the state of crisis situation.
The state doesn’t change market but would create favorable conditions for its functioning and transformation into such called competitive market. The consistency of efforts in this direction would be characterized for the economically strong state. In our situation the government tried to keep equilibrium among groups of coalition with different ascendancy, for this reason government sometime obeyed to considerations of country or row material lobs. Such state has to be considered as weak. E.M.Maiburd wrote in his monograph “Introduction in history of economical mind”: “they aren’t able to guarantee that is stated by Adam Smith: to protect life and property of citizens. Thus it may be said that in modern post socialist counties there were performed such complex system of Laissez faire that not alone western European country recognized. Everybody can do what they want, according their possibilities and with minimal risk. And its power is the power of minority and everybody arbitrariness” [1].
But society nevertheless straggles for the reanimation of economy that becomes possible with the emerging of growth new points. These points need investing process.
To conduct active stabilizing policy, that opens way for investment process, it would be rational to elaborate conceptual approach for this problem. It would be concretized under the concepts of stimulation of complex program of realization of local and foreign investment in state economy and middle term program of government [2].
In this report we discussed the reasons that prevent the creation of favorable investment environment in Georgia. Analyzed the factors that have to be stopped not to influence on the state business and investing environment.
In following report we’ll discuss the improvements and successes, achieved by state after “Rose Revolution”.