Globalization and the ways of improving Georgian Financial System

FROM THE REDACTION

The present article deals with the issues of formation and improvement of independent Georgia financial system within globalization.

Issues of budgetary taxation formation and country development have been analyzed. The present article shows the challenges that prolonged the national economic crisis. Success achieved by measures taken by new government in the sphere of finance has clearly formed.
Strong Scientific, technological, political, social and economic changes in the second part of the 20th century became the basis for the globalization of economic development. National state units, despite their political structure, social and economic relations and the level of industrial development, turned out to be involved in the world economic process.
Aim of highly developed Western countries, attempt to defend their own economy from the outer influence indicates the formation of world united economic space. The transition to the system of ‘Several states – One market’ from ‘Market – state’ has started.
State hierarchy on an international ground greatly depends on the development of economy built on money power, rather than labor, industrial, natural, climate, geographic potential or resources. Today real economic stimuli are defined by the powers of money and market. Since the 70’s of 20th century financial sphere has undergone important changes. Finances have quickly turned into leading forces of financial life. The fact is that, as largest financial institutions quickly cover international economic spaces and economies of developing countries, they take key positions there. What caused the rise of finances? What roles do modern financial conglomerates and international financial centers play in the economies of developing countries?
Modern-day economy is a financial economy, with finances not only participating and serving economy, but also ruling it.
The greatest progress achieved in the spheres of technique, informatics and communication has played and important role in developing financial relations. The quickest connections enabled the world’s economic and social lives to implement any kind of financial operation. The importance of this factor is doubtless. Globalization plays an essential role in the development of finances, being free of state regulation political and economic restrictions, although the process was also supported by national economy complexes.
The question arises: what will happen to post-socialist countries’ financial systems within globalization?
As none of the countries can exist without financial economics, each of them should be given certain place in global financial hierarchy. Let us discuss thee groups of modern social, political and economic resistances that influence post-socialist countries’ real situations.
The First – Resistance between so called ‘civilized world’ and Russia. Russia still finds it difficult to stop violating ex-socialist countries’ independence. Financial centre insists on Russia to pay financial rent, amounted to USD billions, including old debts, interests etc.
The Second – problems between post-socialist countries’ centers and regions. A big part of financial resources mobilized in centralized funds are accumulated in the budget of these countries. Development of territorial units is formal that leads to delay in economic equalization of regions. Georgia’s regions have insignificant conditions for development.
The Third – problems existing between state and citizens. The problem refers to violation of liabilities undertaken by the state, mistrust: deposits, problems of privatization process, and problems of keeping property rights.
Financial system formation and development within transitional economy
Market economy is more and more involved in the spheres of Georgian economy and politics that were once prerogative of state functioning. Administrative-commanding system of management is in the past now. Modern way of life demanded to introduce criteria for estimating the effectiveness of labor material and monetary resources. Countries, including Georgia that became independent of colonial regimes of SSR, went through large economic crisis for a long period of time. The following are the issues hampering market economy development in the country: destroying economic relations, Russia’s imperial policy, inter national discord, violating territorial unity, keeping 300 thousands of displaced people (refugees).
The idea that market is self-regulating and it is able to manage a country’s economic and social development requires being more exact.
It is worth noting that building the bases of market economy without prior, theoretically grounded program shows negative results fro certain period of time. ‘Market economy is the source of progress and self realization of possibilities as well as human restriction, worry and torture’.
Quick move to market economy led to tragic results for the country. Decrease in industry, destruction of existing economy was followed by huge unemployment, hyperinflation, deformation of economic structure, sharp fall of standard of living. Economy had disastrous effects ( GDP in 1994 was 27,5% of 1990) that was followed by sharp fall of citizens’ revenues and standard of living.
Unprepared economic transformation in 90’s of 20th century resulted in economic crisis in Georgia, the longest one among post socialist countries. By the year of 2003 (before the Rose Revolution) GDP level reached 46,6% of 1990, while it reached 80% in Turkmenistan and Estonia, 70% in Latvia, 65% in Russia, Kazakhstan and Lithuania, 60% in Armenia.
We consider Academician Vladimer Papava’s idea to be right regarding the following: ‘General ideas about the role of state in market system’ should be at least partly surveyed. The academician believes the economic capacity of a state to be the fifth factor of industry.
‘Taking decisions while business administration enables an entrepreneur to define a course of activity of a given company. As for decisions taken by the state, they affect the development strategies of all companies involved in state economy’. State should first of all take the responsibility of monetary, taxation and budgetary policy, as they support economic growth, employment and decreasing inflation level. It’s a well know fact that state tired to form a competitive market mechanism, that will create conditions for economic growth through national revenue separation and distribution.
I is important to implement fiscal policy in this regard. Each incorrect action in spending/expenditure part of a budget is harmful for a country’s economic life. If we consider that Georgia has a small revenue basis, a state should pay especial attention to fiscal policy formation process. We should get used to the idea that Georgian National Budget is the only institution and we should reject all other funds that greatly increase expenditures and causes the waste of limited financial resources. New government was absolutely right to annul centralized funds and transmitted their functions to national budget.
Number of negative events took place right in the beginning of building democratic state system: destroying economic life, high level of inflation, corruption, problems of shadow economy, weak taxation administration. All the above mentioned caused the decrease of budget revenues till minimum. The country had no budget till the year of 1995.
1991-1994 budget systems were not regulated. The first independent state budget in 1991 considered the accumulation of all revenues of the country in Georgian budget. 1992 budget was not approved till May. Budget deficit in 1992 was over 55%. The government could not prepare calculations for budgetary revenues and expenditures. 1993 and 1994 state budgets were not proved by the Georgian Parliament. Budget review and approval took place according to quarters. In spite of the fact, that all sources of budgetary revenues were accumulated in central budget, not a single budgetary revenues plan was implemented during 1993-2001.

It should be especially distinguished that industrial rise and economic safety was under a great danger during 1998 – 1999 caused by budget crisis. The crisis has proved that consequent realization of monetary methods within transitional economy is impossible. Besides, taking economic policy from other countries without deep analysis leads to negative consequences.
2. Reforming financial system and success achieved in the budgetary sphere
After the Rose Revolution ways and means of financial system transformation drastically changed. The program related to overcoming challenges in social and economic relations and maintaining harmonious development of a society had been worked out. The program will support the formation and development of market economy. Creation of free market, property – private and safe, inflation – low, trade between countries – free; all these make it possible to create economic growth and development preconditions. They are absolutely necessary to reach price liberalization, full employment, business support, independent management of private companies, independence of Court, minimization of administrative regulations.
In order to overcome problems related to unemployment, maintain safety and social order, a state should cover expenses for the above mentioned functions through taxes.

Revenues and grants totaled GEL 2283 million in 2004, that means that it increased in 69,2% in comparison with the previous year. GDP revenues rate increased to 23,2% from 14,2%. The same situation is in 2005-2006. Joined revenues and grants totaled GEL 3256,6 million in 2005, that means increased with 53,3% in comparison with the previous year (2004).
State budget revenues and grants amounted GEL 4429,9 million in 2006, it increased with 36% in comparison with the previous year. New government has aimed to introduce the mechanism for reforming financial system that would support effective separation and distribution of national revenues, that world be followed by the development of industry, formation of flexible market structures, rise of standard of living, having more or less equal economic development levels is regions.
As for budgetary and taxation reforms, it covers: working out adequate conceptive basis for all levels of budgets, affecting national economy by all segments of state finances, objective estimation of finances and balance of payment, financial planning, accounting and analyzing plan fulfillment, formation and improving the functioning of financial market infrastructure, transforming budgetary mechanisms of each level into the country’s social and economic policy tool, preparing and training financial staff.
Economic advances of our country is in direct connection with effective functioning of taxation system. Theoretically and practically realized and scientifically approved taxes may have a positive effect on national economy. It can destruct negative events and it may introduce taxes based on economic and legal basis. In July 2007 the Georgian Parliament adopted new law on ‘Introducing amendments and changes to Georgian tax code’. The introduction of the law was caused by number of objective reasons and environments. In order to keep the high economic growth, investment and export encouragement should be implemented. Namely, rising competitiveness of local goods by means of decreasing industrial expenditures and supporting re-investment. Further liberalization of direct taxes was considered to be of an utmost importance in this case (decreasing rates on salary and revenues). The fact is that, existing social and revenues taxes were often identical by nature. It made business process for the tax-payer difficult, sometimes even put some tax-payers in unequal position. For instance: for entrepreneur physical persons (individuals) it reached 29,6%, for revenues received by salary – 26,7%.
New tax code (January 1 2005), physical persons (individuals) possessing 5 hectares of land were released form agricultural land property law.
The law on ‘ Georgian Tax Code Changed and Amendments’ aims to:
– Improve investment environment in the region through the most liberal tax legislation;
– Encourage investment and export;
– Keeping high level of economic growth;
– Improving taxation sheet condition;
– Rising effectiveness of agriculture;
– Making taxation process easy for a tax payer;
– Rising effectiveness of taxation policy;
Question naturally arises: how will the changes in tax code influence the revenues part of the budget?
Annulling social tax and introducing an revenues tax rate after simplifying administration, revenues legalization and generally taxation, will compensate probable loses for the first stage (totaled about GEL20 Million).
Due to decreasing profit tax with 5%, the indicator of losses for the first year amounts to GEL134 million. the following years will show corresponding economic effect and revenues are expected to rise.
Now let’s take look at the situation of the taxpayer: private national savings increase, and therefore investment increases. System of loans changes into growth of long term corporate loans; private foreign investments encouragement rises, industrial expenditures decrease. All these affects export, as well as level of employment. Agricultural land market develops, agricultural effectiveness rises, and high economic growth is kept for long term perspective.
Therefore, according to the Law on introducing Changes and Amendments in Georgian tax code, that entered into force in July 2007, income tax rate for entrepreneur physical persons (individuals) is 25% (instead of current 29%), revenues through salary will rate 25% (instead of current 26,7%).
Profit tax rate will decrease till 15% (instead of current 20%).
One of the most serious problems, making negative influence on national economy during the recent period, is the rise of inflation. It is caused by several reasons: first of all by the increased prices on wheat and gas (by Russia) on the world market. ‘Besides, there are purely Georgian objective and even subjective reasons caused by government’s mistakes… Georgia is inflected by Dutch disease mutant, having direct connection with inflation’.
Ways of Improving Financial System in Georgia
Since the Rose Revolution numbers of corrupted persons have been arrested, having regained their freedom by means of paying US dollars. Privatization was implemented through US dollars. Georgian population, living and working in different countries of the world send US dollars. All the above mentioned leads to national currency stabilization. It has negative influence on exporters. National Bank of Georgia is obliged to sell GEL and take extra foreign currency out of us. GEL emission leads to inflation and this causes high prices. Besides, the rise of inflation is supported by current expenditure policy of the government.
It is a well know fact, that the Ministry of Finance usually organizes state budgeting. The work begins 10 months prior to new budgetary year. Ministries and bodies being financed by the budget apply to the Ministry of Finance with the statement on their budgetary expenditures for the next year. An application presented by the bodies, financed by the state budget bears the greatest responsibility, corresponding normative and exact calculations in the countries with effective budgetary process. As for executive power, the application is strictly reviewed and tested. Therefore, the application for issuing financial support from the budget is highly reasoned.
Till the year of 2003 existing practice in Georgia indicated that majority of applications were unreasoned, calculations were less reliable and what is most important, they didn’t consider country’s budgetary capabilities. The following was the principle of writing an application: ‘ask for more and fight so that your request is not shortened’.
For instance, 1995-2000 nearly all Ministries and Councils requested extra financing from 5,2 till 23,8. While executive government could not consider even single grounded request.
The reality of budgetary expenditures application greatly depends on corresponding normative basis. Although these kinds of bases have been created in important part of economic and social spheres, still, there is lot to be done. We believe, budgetary planning has its own drawbacks. Budget revenues and expenditures approved by the parliament faced important changes during the budgetary year and we consider it to be wrong.
For instance, approved budget for the year of 2007 increased with GEL 661 million. Expenditures rise in September with GEL 450 million. 20% of change of approved budget during the year does not show budget planning optimization, especially when it assists the rise of inflation. It would be appropriate to change state budgeting process. Besides, it is necessary to put budget deficit till minimum. Annual rise of deficit is not recommended. The means of its financing is foreign credit, not own revenues that indicate the growth of state debt.