“ABOUT NATIONAL PROGRAMME OF POVERTY REDUCTION AND ECONOMIC GROWTH” IN GEORGIA

GOCHA TUTBERIDZE

This document was published as a brochure in November 2001 and was presented to wide public in the form of discussion material. The introduction says that the document was prepared by a social group by President’s order.

Here we read that “other sub-commissions co-ordinated by the secretariat of the governmental commissions have also participated in the development of the document. Unfortunately, the document does not mention the commissions and their members. Nor does it mention Secretariat members. However, given the fact that the document refers to commissions and sub-commissions, we conclude that a major part of the executive power took part in its development. Thus, this document will, supposedly, become a good reflection of government’s ideological and professional concordance.
As the programme’s authors have been reasonable enough to present the document to public not as a complete document, but as a discussion material, interested persons and your most humble servant have got the chance to express their own opinions about the document. I would like to take the opportunity of expressing my own attitude to the general provisions of the programme in a short, review-like form.
To begin at the beginning, I would like to draw readers’ attention to the appearance of the document. From this point of view, the programme looks solid enough. It consists of 6 parts with many paragraphs containing up to 231 printed pages. The parts and paragraph names in the contents show that quantitative characteristics should not be proportionate to qualitative ones.
Names and order of certain paragraphs point to the fact that the document represents a compilation of programmes independent from different ministries and administrations. As usual, such programmes consider wishes only: “This should be done”, “This should be fulfilled”, but there is not a single word about the ways of achieving results – when, how and through which mechanisms.
It is clear that no reasonable man would ever refuse average salary and annual increase of employment, investment and gross domestic product. But the main thing here is not only declaration of such wishes but also the knowledge of the ways of achieving this mechanism.
Does this programme reflect such mechanisms? Unfortunately, we should note that the detailed consideration of the programme by no means diminishes the initial anticipation, but rather strengthens it.
Namely, the first part of the discussion document is devoted to the “analysis of current economic and social situation in Georgia”. Issuing from the title of the document, one might expect that after the detailed analysis of economic and social situation authors of the forecasts would come to the general reasons triggering this situation. Thus, after comprehensive and direct study of facts, they would be able to ask simple and understandable questions about the interrelation of these facts.
The term “analysis” means that different elements are singled out and studied. However, it is impossible to comprehend a subject solely by means of examining different elements. It is important to determine interrelation between these elements. A direct observation would only give us facts without any relations between them, i.e. a chaotic picture of the reality, but not reality. Therefore, analysis cannot produce any results without synthesis. It can be compared with raw materials or semi-finished goods that have not yet become a finished product.
Unfortunately, the first part of the Poverty Reduction Programme deals with mere statement of facts. Considerations start from macroeconomic outlook and end with problems concerning water supply and sanatoriums as well as increasing consumption of firewood in villages. A great deal of details was considered. They are, certainly, of much interest, but there are no reality and cause-effect relations that determine this reality. Without this, many questions would be left unanswered.
For instance, description of macroeconomic situation concerns mainly measures that have been taken by the Georgian authorities from 1992 till present. From the historical point of view, this does not seem so bad. Yet if we focus on historicism, then we should, probably, start from an earlier period, namely 9 April 1991. Besides, the society is well informed about these measures so it is a bit strange that they were repeated by the programme. As far as programme objectives are concerned, there is nothing new in it.
It is common knowledge that the development of any economic programmes implies collection, systematisation and analysis of facts with the purpose of their subsequent use for the development of economic behaviour model and, finally, determination of a policy. This approach is known as “method of induction” in science and is widely used for the study and solution of economic problems. Generally speaking, study of any subjects or events should always be based on a certain methodology. Method is a tool or means used by a researcher for the identification of social events. No experiments, reagents and tests can be used here. The programme authors are, certainly, not required to solve methodological issues. It is a difficult and laborious work. The world’s best “brains” have spent much energy on it. Yet the programme authors should really know present methodologies that would subsequently be used for the development of a document under this name.
It was due to the lack of single methodology that the authors failed to determine priorities. Main and second-rate issues are interrelated, there are often repetitions and tautological considerations.
Proceeding from the above-mentioned, it is not surprising that the part of analysis did not reflect well the in-depth causes of the existing social-economic situation. Yet this should have become one of main objectives. Unfortunately, in characterising the current social-economic situation, authors often focus on external reasons such as Russia’s crisis in 1998, events in Gali, draught in 2000 and corruption of state officials. There is no doubt in external reasons performing only stimulating or obstructive role, but still they cannot play a definite role. If it were so, then there would be no sense in developing any plans, let alone a programme. External reasons are called “external” because they are not easy to control.
Unfortunately, some representatives of the government have often referred to the crisis in Russia, Turkey and other countries in order to explain their own incompetence and unfavourable buyers’ market in the country. However, they forget that Georgia is not such a developed open economy country. Thus, Bush’s political statements and developments in the world hardly have any immediate effect on the behaviour of economic subjects in Georgia. On the one hand, imperfect market stands in the way of country’s economic development, but its only advantage is neutralisation of external factors. In other words, external factors preserve particular influence, but they cannot play aan important role due to the specific peculiarities of Georgia.
In order to examine the real reasons of the existing social-economic situation, we should begin analysis from the estimation of final demand components. This implies examination of consumption expenses and the dynamics of capital stock investments, the financial state of family household and determination of consumers’ (populations’) expectations of changes in country’s economic state. These changes are much significant for the determination of government’s future measures. After estimating final components of demand, the analysis should cover the financial state of non-budget enterprises. The latter implies characteristics of net profit dynamics, capital stock investments of large and mid-size enterprises, effective and barter demand, dynamics of new enterprises and index of entrepreneurial optimism. The dynamics of revenues and expenses of central government budget should be studied after estimating the financial state of non-budget enterprises. The important thing here is revealing factors that make a significant influence on the level of budget revenues (growth in real sector, improvement of administration, changes in tax law, etc.) as well as analysis of expenditure budget, correlation of interest and non-interest expenses and estimation of government’s budget strategy. Apart from these issues, perfect macroeconomic analysis requires description of purposes of money and credit policy and state of bank and financial market. Price index, money circulation and exchange rate (exchange practice) should be considered here. Finally, macroeconomic analysis should also cover external sector and labour market.
Results of perfect analysis of the above-mentioned aggregates would make it possible for us to give a real estimation of priorities of government’s macroeconomic policy (if ever there is such a policy). This would also lead us to the in-depth causes of the present miserable economic state. We should also admit that a new analysis is not a simple one. Besides the serious professional training, it requires working on enormous statistic materials.
We are sure that if the programme authors made perfect macroeconomic analysis, they would not view poverty reduction in Georgia as a short-term task (see page 71 of the document), all the more so that according to programme appendices, the duration of this period is 2 or 3 years. Given the fact that it took the government two yeas to develop the document, this optimism looks absurd enough.
True, the programme mainly deals with poverty problems. Yet, as mentioned above, it does not refer to reasons as general issues had not yet been solved. As first, they are called “internal and external shocks”. Afterwards, another “main reason” was found – unemployment. The unemployment level, certainly, stipulates social welfare, but it is not a proximate cause as unemployment is also consequent upon certain events. The programme authors are, certainly, not required to determine general reasons of unemployment. This burden was undertaken by other authors once (Keinz, Parrod, etc.). However, the programme authors should have answered to one particular question in the analysis part – what was the high level of unemployment and low economic growth caused by in Georgia?
Failure to find out reasons can be traced in the second part of the programme in the following priorities: macroeconomic stability, attraction of investments, encouragement of small and mid-size businesses, development of human capital, protection of environment and cultural inheritance. Such priorities can belong to a country with a well-off society, but not to Georgia where a principal objective is poverty reduction. Such issues as tax on air pollution, nitrate, CO and CO2 in the part of economic growth strategic priorities can be considered as a figment of imagination. I think that authors were so much carried away by the issues that they have even forgotten which country’s programme they worked on.
It is known that there is a conditional classification of economic theory into dynamic and static ones. Classics of economics are known to be followers of static theory. Their views have become an object of legal critics. The one thing that was considered a priori by followers of dynamics theory is that production is regulated not by average but rather by marginal costs. This principle was only ignored in social society. The result was obvious. In modern post-industrial countries, limited use of the principle of marginal costs is only characteristic of nationalised sectors of economy. Proceeding from the above-mentioned as well as from the programme priorities, we think that the programme authors do not have a clear idea of limited resources, liberty of choice and marginal costs. In some other cases, they try to single out priorities that can be achieved in the existing conditions.
The programme attaches much attention to the issue of investment environment. It is natural as economic growth and poverty reduction is in direct relation with the improvement of investment climate. Unfortunately, the programme authors fail to follow consistency and come to illogical conclusion. In their opinion, Georgia does not have internal resources for investment, as population of Georgia is insolvent. Therefore, it is necessary to attract foreign investments. This requires perfection of investment environment. Thus, priority is attached not to an investor on the whole, but rather to a foreign investor, which is, certainly, absurd. A state cannot create special investment climate for a certain investor or group of investors. For one thing, this contradicts the principle of free competition that is a keystone of liberal economy. For another thing, this approach is merely Utopia.
In any country an investment environment represents a single space. Investors, both residents and non-residents, estimate perspectives of investment act. Therefore, they assess the marginal efficiency of capital not by current, but rather future income. Thus, they worry about one thing – whether or not they will receive the planned income. At the same time, they act on the principle of marginal costs and continue investments before their expenses provide for future incomes. Therefore, they are interested in many other factors that are not provided for in prime costs. However, the latter might greatly affect future incomes. Priority is given to one of the factors known under the name of “transactional expenses”.
We will cite a certain petty trader’s (investor’s) letter to Kutaisi prosecutor’s office published in “Alia” (March, number 30, N38/1248) in order to introduce the meaning of “transactional expenses”: My enterprise deals with the production of half-smoked sausage. We sell it in the adjacent area of Kutaisi… We face many obstructions starting from tax officials, veterinary service, ecological policy, sanitary service, license service, etc… The above-mentioned services deserve respect; some of them take sausage, others money. I cannot stand this any more…”. This provincial story describes obstructions faced by investors on the whole, no matter whether they are foreign or local ones. Proceeding from the principle of marginal costs, investment in this or that enterprise or branch might be profitable, but it might also involve losses due to transactional costs.
In science, transactional costs are connected with property right and contract performance. The amount of expenses depends on the development level of this or that country. It is early to speak about liberal economy in a country with so great expenses. Douglas North, Nobel Prize Laureate, mentions problems of transactional expenses. He says that “in the conditions of unprotected property right, disregard of laws, low quality of market penetration and monopolistic limitations, investors who aspire for high profits choose a short-term strategy, create petty capital stock and keep to small scales. The most attractive sphere is trade, mediation and operations in black market. Firms with large capital stock enjoy state support. Such economic structure is ineffective”.
Proceeding from Douglas North’s above-mentioned estimations, observing the economic situation, one would see that the country has turned into an arena for petty and street traders, that only petty and micro business is the only viable one. Large business functions only with the support of men of weight. Therefore, it is not surprising that very seldom someone manages to amass a fortune in a legal way. The existing reality makes them resort to criminal ways of enrichment.
Contrary to the programme authors’ expectations, Foreign Investment Council formed under chairmanship of the President by order N87, will, certainly, not solve transaction problems. Such councils do not reduce, but rather increase transactional expenses. It is surprising that President’s non-competent councillor misled him into signing such a purposeless document. In reality, he passed his responsibility on the President. Investment environment should be created by the legislative, executive and judicial authorities, but not separate administrations or councils. This requires single political will.
Thus, population’s low income does not play a decisive role in livening up investment process. The important thing here is investment environment. Population’s income will be low unless there are radical changes, first of all, in structural and institutional branch. Foreign businessmen will not make any investments no matter if the Georgian government requests them to do so.
If the programme authors had really wished to develop a real programme, they should have calculated transactional expenses in the current stage, which would change the situation radically. Instead of it, one often finds general, slogan-like calls for liberalisation of entrepreneurial activity and settlement of licence-related issues.
The programme attaches much attention to the effective and fair distribution of country’s resources. At the same time, by these resources the programme authors imply funds accumulated in budget. Even a student knows that funds accumulated in budget are only a part of country’s resources. Thus, no matter how fair the Finance Ministry distributes the budget, it cannot be called “a fair distribution of country’s resources”. Apart from the inaccuracy, the question “Who will distribute country’s resources” is arch-principled. The analysis of present economic orders reveals the fact that there can be only two distribution subjects: market and state. In the first case, a state determines general rules of game and tries not to interfere with it. At any rate, this does not hamper the market. The system might not seem quite fair to us, but in accordance with earlier practice its advantage is freedom of choice and dynamic development of economy. In another case, a state undertakes “fair” distribution of resources and dictates terms to entrepreneurs. As a result, entrepreneurs and the whole population get under the control of state bureaucracy and turn into a tool of realising its interests. Instead of the dynamic economy, we have “Poverty Reduction and Economic Growth Programme” that is aimed at brainwashing more or less informed poor population so that to prevent them from understanding the real causes of their poverty.