Competitiveness of Georgian EconomY: Challenges, Opportunities and Priorities

Demna Kvaratskhelia, Associated Professor Globalization and regional interaction Research Centre Chief scientist-worker

Ongoing globalization processes in the world caused changes in foreign economic relations’ basic conditions, rising international financial and economic organizations’ as well as transnational companies’ role in world economy functioning, decreasing the role of severing states.

The mentioned situation is especially visable on Georgian economy which undergoes transitional process, is being formatted. The country doesn’t have a long term perspective, scientifically proved national strategy. As a result of historical heritage (low effective production) and events that took place while postindustrial transformation (military coup ethno conflicts, deepening economic crisis and destroying national production) the country’s competitiveness is low. Accordingly, keeping country’s economic development and national identity remains vague. The country and a nation with a small open economy as a rule should work out a kind of immunity against outsiders changes. It will give the opportunity to adapt the above mentioned changes and keeping its own identity. It is essential to create corresponding material basis for our country’s development, maintaining economic security, and keeping national identity within world’s economic globalization.
Accordingly, realizing the type of economic policy and structural changes, that will enable a country to develop priority fields and obtain competitive advantage in international distribution of labor.
Increasing the country’s’ economic competitiveness and obtaining competitive advantage is of an utmost importance as it is the basis for economic growth, increase in standard of living of the people and maintaining national economy security.
Professor Michael Porter of Harvard University’s Institute for Strategy and Competitiveness identifies the productivity of an economy as the major driver for competitiveness.
Constant increase of economic productivity implies continuous economic growth. Therefore country competitiveness is defined by productive usage of resources and on the basis its capacity to //introduce constantly innovations and inventions (see pg 24-25)
Danish economist, Ionson B. defines competitiveness as ‘ a capability of a country’s economy to keep stable economic growth by fully employing economically active population, without state foreign debt and balance of payments deficit (2, pg.30)
Therefore, degree of country’s competitiveness is determined within open market economy, fair international competition, resource usage, constant production and supply of high technological and high quality goods. High level of economic competitiveness implies the participation of a country in labor distribution that leads to stable economic growth, the increase in the standard of living and income of population, strengthening national economic security.
Which are the factors that support increasing competitiveness of the Georgian economy? What are the country’s resources to obtain competitive advantage?
Any country has a specific competitive advantage in the world market. A country may have a competitive advantage due to suitable geopolitical and/or economic-geographic location. It means the advantage from political point of view, strategic location and/or trade routes of different economic centers, being in the centre of energy resources distribution network.
For example, in Middle Ages before destroying the Byzantine empire by Turkey existing political situation defined both suitable economic-geographic location for Italian city-states (Venice, Genoa). After the collapse of Byzantine empire the situation changed drastically, as routs connecting to the East were closed, and Turkmenistan became main trader. Italian city-states lost their competitive advantage that they had obtained as a connecting circle between Eastern Europe and Western Europe. The situation after discovering navigable waterways to Asia brought new challenges and opportunities for Western European countries. The Kingdom of Great Britain gained special strategic geopolitical and economic-geographic position. Soon it became the leading finance and economic centre. Ireland, as well as Spain couldn’t succeed in this respect due to different subjective or objective reasons.
Suitable geopolitical and economic-geographic location requires rational usage. Otherwise, it may become a source of a new problem. Georgia’s location at the crossroads of Asia and Europe may lead to prosperity if society and the government meet new challenges and rationally uses its opportunities. It may lead to destruction as well, in case Georgia is not able to defend its fundamental interests an/or becomes the subject of constant disagreement and conflict of the world’s leading countries. The best way for a country to obtain competitive advantage is to use progressive forms of inherited organization management, to equip it with modern technologies, high qualified employees, to develop scientific-research potential and apply its outcomes in industry. It will enable to develop high technological fields. This is a guarantee of maximum benefit from international labor distribution. Unfortunately there is a lack of the mentioned factors in Georgia. The only hope is that Georgians are talented people, constantly looking for innovations. Corresponding educational and economic policy is a guarantee of desired effect – rising economic competitiveness.
Following the above mentioned, general factors and sources of a country’s competitiveness are:
– Economic- political and geopolitical location;
– Existing resource (human, material, raw-material etc) potential;
– Cultural heritage and traditions, attitude towards labor and business, labor discipline etc.
– Educational and scientific potential;
– Political system and management methods;
– Economic development Level;
On the basis of the above mentioned factors and resources economic structure and comparative advantage is formed in international distribution of labor.
The process of revealing comparative advantage and correspondingly sector structure varies in Georgian economy. Structural changes in Georgian economy is fully depended on invisible hand.
Forming the mentioned structure is implemented with the impact of strict selective method. During the process of selection the biological organisms continue to exist, that can not adapt with strict competitiveness.
The process of formation may endlessly continue in case state doesn’t interfere or it may have the consequences that are not acceptable to national interests (national economic security, rising standard of living).
State interference in the process of country’s filed structures formation is positive. Qualified employees, scientific and research potential, institutes and infrastructure development requires hard work and state interference, its ability to encourage effective industrial potential formation, plays an important role in this process.
Long-term result oriented state economic policy is of an utmost importance. It may enable to obtain comparative advantage in order to raise national competitiveness in the sphere of high technology and expensive production industry. Its worth noting that the business choice depends not only on country‘s natural comparative advantage, but also on determining priorities and working out long tern economic policy by the government. Georgia, like any other developing country, should try to adapt specialization and to obtain advantage not only in traditional sectors, but also in high quality, high technological and high productive industry spheres. As this is the only way to reach a long-term competitiveness, to rise incomes, wages and standard of living, improving conditions for population. In order to increase national competitiveness in Georgia it is important to support the development of the spheres, being basis of effective usage of resources. Georgia can successfully participate in international distribution of labor on the expense of traditional spheres: agricultural and food production. In order to maintain national economic security and to improve population’s standard of living it is important to define high technological and high productive sectors and to promote their development. It is essential to reveal the fields that may be developed in a country by means of rational application of existing potential (scientific, labor, natural etc). These fields have long term development perspectives (pharmaceutical, telecommunication equipment, tools production have these perspectives). Attention should be draw to developing new, high technological and expensive production as well.
The above mentioned fields will promote the development of so called clusters. According to Porter, the basis of country’s economic competitiveness is companies’ competitiveness. The companies being able to produce with minimum expenditures high quality and high technological goods, which are demanded on national as well as world market. Existence of competitive companies leads to formation of competitive fields that in it s part maintains country’s competitive advantage on international market (3, pg.29-41)2
Maintaining business promotion and caring out corresponding encouraging policy is essential for forming competitive economy, the following are especially important:
– Making legal procedures for starting industrial activity simple.
– Creating real guarantees and property rights and freedom for entrepreneurship
– Rising private property legitimization level. Private property legitimization low level is caused by tragic events of 1991-1992. It is essential to make private property legal on the basis of amnesty in order to raise private property legitimization level. The issue of obtaining illegal property should be decided by court considering all norms and stages.
– Working out certain mechanisms for implementing antimonopoly events and their realization has an utmost importance.
– Implementing optimal taxation policy, which will support budget with necessary means. It will also effect the development of national economy.
– Simplification of a Tax Code. It should be rewritten with simple, clear language. Separate articles should not be against each other, it shouldn’t be vague and should give the possibility of misinterpretation.
– Differentiating tax rates according to incomes and/or regions.
– Paying taxes. In spite of the efforts taken by the government is this field, those who pay taxes are often under the threat of going broke. The reason of it is that they are under pressure. They don’t feel safe in a competitive fight against improper tax payers; accordingly they try to avoid taxes. That is why our business persons do not feel moral responsibility towards the government. Strict measures in case of avoiding taxes should be taken by government representatives, as expect the moral harm that tit may cause to those who pay taxes, it is a bad moral example to the entire society.
Besides, the business environment should be created, where entrepreneurship and business success depends not on the change of the authority or its representatives, but on stable laws and institutions, fair system of jurisprudence,
Porter considers the export competitiveness to be the basis of competitiveness estimation. He considers export goods’ share in total world export to be the economic competitiveness indicator ( 1, pg 27)
It’s worth noting that foreign trade balance has remarkably changed to worth in Georgia that is reflected in decreasing the coefficient of import (see table 1).
As authority claims, this is caused by rising level of import legalization. The part of it may be true. Although export legalization was implemented during the same period. We consider that the first main cause of the worse foreign trade balance is a total liberalization of foreign trade. The Georgian authority canceled imposed restrictions on import while becoming a member of the World trade organization. As for the second reason, it is the business environment changing for the worse. (Mainly for the local entrepreneurs), this is proved by drastic decrease of local investment for the year of 2006.
Let us take an example. According to the data Department of Statistics, in 2006 in comparison with the year of 2005, the volume of Georgian investments decreased with Gel 954 million, it amounted to Gel 1493,5 million. This is the lowest indicator since 2001.
We can see that rising national production in Georgia requires establishing suitable business environment. Encouraging export with suitable taxes and using suitable credits needs a special attention. Besides, it’s worth noting that is imposing indirect taxes on export goods is essential, although it is not the basis of raising its competitiveness. The above mentioned products pay taxes imposed by import country. Accordingly Georgian production has advantages over those country’s products that have less indirect (G.D. Customs) taxes.
The tax rates are low in number of counties. In some of them they are quite high. Others have the same tax rates that we do in Georgia. Therefore, the effect of taxation system on rising national competitiveness is neutral. We can not claim that taxation system of export and import supports the national competitiveness rising. We need to take more precise measures, namely, issuing suitable credits only for the export oriented enterprises.
Developing national production and industry, improving trade balance and increasing export are in close connection with decreasing Gel (Lari) exchange rate. Estimating events in the nearest past is interesting in this regard.
By the end of 1998 Georgian national currency Gel- lari on the basis of devaluation should cause the rise of national production competitiveness and economic growth. In fact, economic growth rate fell in the following years. What was the reason? We believe that Lari devaluation by the end of 1998 was a late reaction of the National Bank on the one hand toward increased prices in 1996 and on the other hand towards processes that took place in Russia in August of 1998. the result of these processes was a drastic devaluation of the Russian Ruble. It resulted in cheap Russian goods , that effected negatively Georgian market, as enormous number of illegal import dominated Georgian market,. Georigan government due to subjective or objective reasons did have a quick and adequate reaction to the processes. It ended with harmful and negative effects for national production. Therefore, the reason of decreasing economic growth rate by 3% in 1999, and by 2% in 2000 didn’t lie in Gel devaluation towards USD, but it was a late Gel devaluation, that was followed by dominating Georgian national market by cheap Russian import (the same can be said about Turkish and other imported goods) as well as the decrease of Georgian export volume (legal and illegal). It took 4 – 5 years for Georgian entrepreneurs to adapt changed environments and obtain lost positions. Destructing economic space and damped goods flourish in 1998-2002 had terrible effects on Georgian national entrepreneurship.
After gel devaluation Georgian national production could not quickly gain lost positions. The reason to is was that it lost important segments of local as well as foreign markets. Georgian entrepreneurs couldn’t start activities from the begging and could not return to the lost markets. In spite of it, national currency devaluation had positive effects in 2003. it is a bit strange for the pas years while comparatively high inflation and high nominal and real exchange rate of Gel there is a high economc growth. This is a bit irrelevance. The high inflation rate somehow encouraged economic growth in 2004- 2006. In spite of high nominal and real exchange rates of Gel export volume increases nowadays (export growth, as well as economic growth is caused by improving criminal situation, improving administration procedures at customs service, increased foreign direct investment volumes etc). Although the fact that import is greatly increasing that hampers the development of national production.this may have negative long term effects. We believe, increased price of national currency , taking place from the year of 2004 , will have negative effects in 2008 -2010. we also consider that
National currency nominal and real exchange rate decreasing should take place in stable economic environment. When prices do not exceed frames. The above mentioned economic policy has positive effects only in stable microenvironment . Deepening economic crisis and national currency devaluation will definitely cause price increasing that will have destructive results. Decreasing national currency exchange rate is the one of the ways for improving foreign trade balance. We should research the reasons of exchange rate and inflation simultaneous increase.
Exchange rate rising reasons lie in increasing Foreign Direct investments, foreign aids, and sent finances by our citizens living aboard.
Requirements for taking credit are too simple nowadays. That caused a real boom in this sphere. Moreover, debtors cover debts of a commercial bank by taking new loan from other commercial bank. No restrictions. This deepen the inflation process.
In this case is essential to decrease inflation and exchange rate of Gel simultaneously: first, National Bank intervention on monetary market to buy USD and decrease Gel exchange rate and the second, to restrict inter loans/credits. Although the first action will cause price rising , but the neutralization is possible by means of the second action.
It is not easy to implement the abomve mentioned credit and monatary policies, although they are essentical for rising national production’s competitiveness.