Cyclic Nature of Modern Economic Development

Lamara Qoqiauri Doctor of Economics, Professor

Considerable adaptability of development of modern economy is revealed in its cyclic nature.

Every structural crisis in world economy gives rise to formation of some new opportunities. Capital of the leading countries of the last economic cycle is being devaluated. Qualification of labour forces using old technologies are ruined, while the countries, which managed to create innovative potential proved to be in the centre of attracting capital which is independent from the old production. Consequently, the countries that implemented scientific-technical and industrial capital investment policy in prospective fields will be given a competitive advantage. The realization of this policy in the phase of structural crisis gives its authors the opportunity to achieve economic growth based on competitive advantage.
Basic scientific and radical innovations are recognized as the main means of overcoming structural crisis, that are implemented through acquiring new achievements and rising the effectiveness of traditional development .
In order to move to the stable stage of economic development it is important to increase innovative-investment activities and to involve new technological directions and basic technologies at trajectory of firm economic development. The economic policy that is oriented at encouraging investments, providing innovations for modernization of the economy, increasing its competitiveness.
Innovative way of investment policy development. Thus, the main importance is given to the innovative type of development that implies the growth of government’s role in exercising investment policy. Highly developed countries take the responsibility of financing fields like fundamental science and high-risk researches, as well as the development of scientific research infrastructure. Spreading new ideas and educating population. The implementation of these functions takes place against the background of scaled investments. That creates favourable conditions for production growth based on scientific innovations.
Currently government tries to create development institutions, which will support investments in new technologies, stimulate innovative activities; encourage progressive technological changes, that unites financial, labour and informational resources. The state may avoid the responsibility of developing the production activities, where special markets and competitive relations are formed. At the same time, it must encourage new, high-risk directions of investment activities that pave the way to creating production via introducing scientific and technical achievements.
For example, the wave of economic regulations, which spread from developing countries in the late eighties of the last century, covered the traditional branches of economy but it had no connection with high-technological sector, conversely the importance of direct state support institutions for innovation activities were increased. At the same time, the importance of elaborating state strategy for scientific technical and social economic development grows. The state aims at creating enterprises that will manage to gain com putative advantage over the companies of inner and foreign markets. They must concentrate their resources on prospective fields of production.
The direct instruments of state influence are oriented at supporting private initiatives and innovative enterprises that will stimulate investment activities in certain fields and production initiatives.

The necessity of financing science and its current condition. Active investment process, especially in scientific and technological fields, innovative and scientific-technical activities lays in the foundation for economic growth. Nowadays, the decline in scientific technical potential is caused by the fact that there is no more unity between scientific researches and their usage. Former scientific staff has been dismantled and number of intellectuals have left the country.
Consequently, the country becomes more dependent on foreign traders.
Therefore, in order to create favourable conditions for economic growth capital renewal is essential, but it is very complicated, because of the decrease in state financing and absence of ordering production, Science and education have no inner resources for development.
During the last few years, there has been significant reduction of scientific and educational research expenditures. As a result, the share of expenditures in GDP spent on science in 1999 amounted to 0,97%, which is twice less than in 1990. In 2006, the expenses spent on educational field amounted to only 1,5% of the GDP, which is the lowest index among the transitional countries.1
Significant reduction of company’s demand on innovations resulted in increase of financing scientific field from the state budget. Budgetary expenditures on scientific-research and construction work have been absolutely reduced and they are tending to decline against the GDP as well as the budgetary share of the expenses. The degradation of scientific potential is proved by sharp decline in expenditures used in research and construction work and it resulted in dropping behind highly developed countries. Expenditures on Scientific research in the USA (1998) amounted to 794% per person, in Japan – 715. In Germany 511 and 611in Russia, whilst in Georgia it only amounted to 2,8%.
Due to sharp decline in financing the scientific field, renovation of scientific facilities deteriorated. The salaries in Scientific field decreased, The coefficient of renewing main foundations in Scientific technical field significantly decreased. According to the latest statistical data, 311 ml. Gel was invested in renewing main capital, that amounted to 60% of all the capital invested, in Georgia Instead of renewing Country‘s technical market, most of the capital was invested in activities connected to local market. 29 % of this capital was invested in real estate and construction, 24% in transportation and communications.2 The problem of keeping, supporting and developing fundamental and research centres of science aggravated. During the Soviet era, 20% of production was created in the USSR, but now Georgia’s share in the World scientific production in only 0,3%. Implementation of innovations requires a wide range of activities, from doing research to producing new output. Priorities of innovative activities change at every stage of economic development.
In order to achieve economic growth in current conditions in the country it is necessary to develop scientific innovations that create new directions while not taking into consideration current directions of technological development. This lays the foundation for putting so-called innovative multiplication into motion, which is connected to investments and results in production increase. That creates improved scientific innovations, which replace old technologies. Introduction of these innovations is exercised by new investments that encourage the further growth in production. Thus, innovative multiplication makes good influence on production growth, takes the economy out of depression, and leads it to a long-term development stage.

Distribution of investments on Scientific – technical works. It is relatively typical for developed countries to distribute private and state capital investments on scientific and technical works. For example, The USA’s private investment share in innovative market amounts to 50%. Similarly, according to the figures of state expertise, 10% of innovations are given a strategically important status and accordingly they are financed from government sources. Japan finances 33% of all the scientific researches. 73% of scientific-researches and constructive works are implemented based on self – financing in the USA, in Germany this index amounts to 70%, in Japan and UK 62%, France and Italy 57%. Therefore, the only possible mechanism for promoting social and economic development is its technical modernization and move to innovative type of development.
Technical modernization of equipments and their reconstruction requires attracting important investments in innovative field. Here it is important to activate state policy on scientific and technical branches and to work out important directions for scientific-industrial development of economy. At the same time, the state that takes important part on technical modernization of the economic sector must take the responsibility of financing fundamental sector of science and high-risk researches; restore activity of science financing from the state budget and develop scientific infrastructure. In order to define the proportions of sharing investments, it is essential to focus on cyclical development of economy and on intensive types of re-production, that is reflected on the statistical law of dividing expenditures, for example, spending on fundamental research, applied work, capital investment amounts to 1:3:9:27.
Statistical law of resource division in accordance with scientific-technical potential is used at the production development stage where scientific and technical progress is achieved by practical laws that help to solve the problems of production stabilization and development.
The reason of decrease in scientific potential. The decrease in scientific potential in post soviet countries is caused by lack of restructuring scientific organizations; privatization of research centres has not brought any desirable results. The reason for this is that enterprises do not order them to do research. Simultaneously, scientific staff becomes older, the last ten years science suffered from loosing its intellectual potential. In this case, it will be reasonable to merge different scientific organizations and some research institutions. Transform them into enterprises, to manage scientific technical potential encourage its strengthening.
The sources and ways of funding science. Restructuring research institutions and dividing it into firms with developed financial, economic, marketing, and commercial infrastructures will increase the practical use of research work results. Contract based applied science makes the realization of scientific technical projects possible. They will be implemented at the expense of the state budget, non-state expenses attracted by venture, sharing other financial mechanisms. The question of mobilizing these sources can be solved based on aimed, scientific, and technical programs on regional and federal levels in accordance with the market demand.
They can be implemented in the form of portfolio investments using stock marked tools. Providing the state with grants and safeguarding institutions by investment agency and trust management has practical usage. In order to form non-budgetary recourses for financial innovations it is necessary to use amortization funds on renovation in the part, where production expenses, especially those spent on research and innovations, are taken into consideration as well as the expenses of exhausting financial resources, that is included in the production cost and is reflected on the production price. In addition to that, revenues that came from selling scientific-technical production, or having the right to own intellectual and industrial units as well as the revenues from scientific and technical units and selling the right to own them must be considered too.
The role of innovation foundations. Practical usage of abovementioned sources is implemented according to the special rules and accounting, based on used methods. The expenses received from these sources are transferred to a separate sub account “innovation foundation”. State funds for innovations, which is aimed at realizing prospective directions of science and technical development enables to elaborate modern competitive production and organize its production. Besides using state budgets expenses, other market mechanisms for attracting investments are used as well.
Nowadays, innovation-investing mechanisms are used only if banking structure, which mobilizes recourses and regulates their use in science. Banking structures are directed at investments, they accumulate vast sums through creating consortiums and other financial and investment institutions, in order to attract own funds for innovative programs of investment. IN terms of budgetary deficit, banks finance all the phases of innovative cycle and provide insurance services. Participation of banks in the field creates extra stimulus for different firms. No other structure manages and controls innovative recourses as well as the banks.
Effective use of stock market instruments provides opportunities to attract investments in innovative field. Its main aim is to divide investment recourses among fields and provide inner and foreign investment flows in more prospective sectors of national economy. Transitional economy does not provide the conditions for populations to transform their savings into innovative investments and thus provide economic growth. Monetary potential saved in the country is practically unused. The amount of savings is much higher than in the USA and west European countries. In order to invest funds existing in the country in essential sectors of economy it is necessary to make the forms of collective investment perfect. It includes investment share funds, credit contacts joint stock and commercial funds. After that, government should control their activity and they must draw their attention to new forms of scientific-innovative and investment forms.
Main stages of innovative development. Innovative development of economy as any process must be oriented at its stages, levels, and phases. First, the technological basis of the field with demanded production on the market must be renovated. At the same time, the market is expanding with importing goods, introducing innovations that are oriented at modernizing recourse-saving technologies and improving consuming qualities. Therefore, at this stage our main aim is to create infrastructural and institutional grounds for firming scientific technological potential. Than we have to organize the enterprises that produce and sell new technological products that, enable the country to restore its positions on the world market of scientific technologies. Simultaneously the role of the country in production and investment activities that is directed at commercializing innovations must be strengthened. Gradually country should move from supporting quantity aspects of scientific technical field to quality aspects and to new forms of engineering that use modern informational technologies.
Main directions of state investment innovative policy in the future are:
– Choosing national priorities of innovative field development for realizing innovative projects, choosing the projects of technologies that influence production growth and increase country’s competitiveness.
– Coordination of activities of legislative and executive bodies to work out complex approach to solve this question concerning country’s innovative development, effective functioning of innovative systems and implementation of state’s innovative investment strategy.
– Maintaining and developing scientific and industrial-technological potential of fundamental science, elaborating employee-training system for maintaining and developing modern scientific and technological level and developing science to a higher level.
– Providing favourable economic and financial conditions for activating innovative works, developing venture, engineering and investment-industrial activities and for rising competitiveness creating favourable conditions for investing in innovation field enables modernization of scientific and technical basis of national industry as well as raising the competitions of the country.
New directions of innovative activities and priorities of innovation policy consist of three stages. On initial stage, the main goals are reproduction of the technical basis of the field with stable demand production on the market; market expansion by producing the goods that replace the imported ones; innovations oriented to modernize the enterprises, which use the resource-saving technologies and improve consumption quality. Therefore, it is necessary to create infrastructural and institutional basis in order to move on the next investment stage of state development. At the second stage, the enterprises that realize the technological order are created. After that the production is introduced on domestic and foreign markets that makes new products competitive in new market sectors, and it creates new scopes for demand, where national products dominates to meet the demands. At this stage, country’s activities are directed at attracting high-scale private investments, creating necessary infrastructure for investment-development, support, and perfection.
At the third stage, the following important questions must be solved. The aims are supporting innovative infrastructure of the country; creating conditions for demand on national products, informational support to enterprises making stable contact with science and industry.

New ways of implementing scientific-innovative and engineering activities. State focuses on new forms of scientific innovation and engineering, that use modern informational technologies and gradually they move from quantity aspects to quality ones that are implemented in the following ways:
1. Maintaining and developing scientific and industrial potential and using them in achieving modern technological level.
2. Choosing rational strategy and priorities in order to develop innovative field. Implementation of critical technology and innovative projects in the fields that influence the effectiveness of production and their competitiveness.
3. Creating favourable economic and financial condition for activating innovative works, legal industry, and competitiveness.
– In order to implement these measures, following practical activities must be exercised:
The process of providing information must be radically improved and commercial structures must be involved in developing scientific educational and innovative activities.
– Reconstructing the part of research and project institutions and closing the ones working ineffectively.
– Create the system of venture investment. State should support venture business in scientific technical field until the industry becomes interested.
– Developing the system of noon. State innovative risk and private supply, creating insurance groups within the framework of financial-industrial groups that will undertake high-risk insurance that is linked with creating innovative production. Insurance companies together will share the risk.
– Using modern methods for forecasting engineering and scientific production marketing.
– Developing small innovative business by creating favourable conditions and infrastructure for setting up small enterprises and their functioning.
– Creating suitable legislation that will regulate relations in intellectual property field, work out normative acts that are directed at exercising state policy. It foresees involving of scientific-technical results in industrial circulation that is implemented at the expense of the state budget.
– Creating typical state contracts in order to balance legal interests of the participants in the process of using scientific-technical results.
Therefore, the main factor while working out investment policy is to move economy to the innovative way of development. In this regard, a country’s main role is to create the mechanisms that provide the formation of national innovative system and develop innovative business that enables the modernization of technological market and competitiveness of national production.
The formation of adequate investment activity model in the market system of economy provides replacement of investment resource division with new forms of investments. For its part, it has to work out the investment policy that will accord with changed economic conditions.
Official concept of reforming Georgian market economy is based on simple monitoring principles. Their realization was expressed in minimizing the country’s role, automate foreign economic activities, privatizing state property and forming market structures.