Problems of macro economical regulation of unemployment and inflation In Georgia

Vazha Verulidze Shota Rustaveli State University Associated Professor

Market economy is characterized with the threshold level of unemployment and inflation.

In case of deviation its regulation from the above mentioned level is under the macro economical policy of the government. The optimal level of State regulation of the economy can be achieved on condition of the necessary institutional capacity for the market development that is expressed in elaboration and realization of the legislative basis for the concept of private property, system of free price calculation and competitive environment; for instance, if there is no antimonopoly legislation in the country, the market structure bears evolution in the process of transformation from the complete competition to monopolistic competition, the prices increase and usage of the tax regulation leverage becomes inefficient as reduction of taxes causes increasing of profit of monopolies and increasing of taxes causes increasing of prices. The similar types of monopolies were established in the country on the basis of the of pharmaceutical and oil production and cell communication market segment that underlines the fact that there are not any relevant conditions for free price calculation in the above mentioned segments that hinders it to be regulated by applying the leverages featuring the market economy.
The EU countries which set the target to activate the real sector of economy pay special attention to the macro economical regulation of unemployment and inflation in the light of the world economical crisis, in particular they implement the financial support to the small and medium enterprises; reduce VAT; issue state warranties against bank accounts; increase investments in industrial technologies; significant support to the unemployment and so on.
In Georgia the share of value of real sector of economy and its contribution in the formation of tax yield of the budget is minor that is clear on the basis of analysis of the structure of the income part of the consolidate budgets. (See table N1)
The structure of the income part of the consolidated budgets1
As it can be seen from the table, in 2007 the specific value of tax yield reduced and specific value of nontax yield increased in the total budgetary incomes compared to 2004 that signifies the reduction of the economical activity for this period; the same is justified by the increasing of the specific value of the indirect taxes (particularly VAT) in the budgetary tax yield. Increasing dynamics of specific value of indirect taxes generated from the imported production was clearly outlined both in tax and in total indirect taxes. During 2005-2007 55% of the budgetary tax yields are indirect taxes and indirect taxes derived from the imported production reach about 70% in the total budget indirect taxes for the same period that only indicates the fact that the significant part of the state budget is related to the import of goods. If the fact is taken into account that VAT as the most solid tax is of many stages and it is derived at all stages of turnover including the realization of imported production within the country, the specific value of VAT generated on the territory of the country in the budgetary tax yield will decrease more comparing to data provided in the table that underlines that VAT derived from the realization of production on the territory of the country is not related only to the domestic production or service provision.
Comparative analysis of growth rate of budgetary tax yield and import for 2005 -2008 shows more clearly the orientation of the country to the import and existence of weak real sector. (See tables N2 and N3).
As it can be seen from the table 2 the absolute indexes of the budget growth increase annually, though according to table 3 it is clear that in comparison to the previous years the growth rate of tax yield almost coincides with the growth rate of the import for the same period. By 2008 tax yield increased 1.082 times in comparison to the previous year and the import increased 1.161 times; that means that the difference is only 8%. It justifies once again that tax yield mainly increase not due to increasing the real economical sector, but improvement of tax administration quality and import growth which was 6 058.1 mln US dollar by 20082. That means that tax potential of the country hasn’t changed mainly for the stated period; subsequently the stability of budget faces with serious hazard as the mobility of resources of tax yield is not sufficient.
Georgia State and Consolidated budget performance indicators3
Growth rates of registered import of goods and tax yield
In the context of current conjuncture the state regulation of unemployment can not lead to the real outcomes as the world widely probated state policy in the field of employment and unemployment functions in different environment and it is mainly oriented to the real sector of the economy, in particular there is a constant necessity of the regulating and stimulating function of the government and main directions of the governmental policy concerning employment and unemployment are following:
Ø State programs oriented to the stimulation of growth of the employment level;
Ø Programs oriented to the training and retraining of man power;
Ø Programs supporting recruitment of man power;
Ø State programs of social insurance of unemployment.
There is no necessity for manpower training and retraining in Georgia for the real sector of economy; on the other hand, the wide operation of the unemployment social insurance state programs is related to state budget stability. From the above said it can be concluded that if the macro economical regulation is not able to be realized that might damage significantly not only the economy of the country, but also democracy.
“Unemployment causes the main social and psychological problems for people who are unemployed. The experience of 30th shows that long massive unemployment can threaten even democracy”4.
The efficiency of the economy of any country is mainly stipulated with constancy of its currency, low inflation rate, reliability of bank system and so on. These conditions can be provided only on condition if the central bank is liberated from political conjuncture and is independent in taking decisions concerning selection of regulation leverages.
Since the establishment of the National currency in Georgia the currency and monetary and credit policy carried by the National bank was directed to the stability of the National currency and was one of the main leverages of the anti-inflationary policy. The accomplished outcome resulted from the activities implemented by the National bank and recently increased income part of the budget (table N2) can not reflect the real situation of economic development of the country as the maintenance of the currency indicator at the some level is achieved due to National bank interventions. It should be underlined that in condition of anti-inflationary policy performing in the country (that in any way means to stop inflation), the central bank is limited in performing its activities by the currency rate policy which is chosen by the government under the necessity of its coordination with tax-budgetary policy. This approach may cause negative effects of social and economical types as these kinds of activities lead to decrease the population’s ability to pay.
Despite pursued anti-inflationary policy the expectation for the further inflation is maintained in the country that is precondition of the upcoming inflation; it is justified by the expectation inclusion into the Philips’ curve that is the main contribution of the monetarists in the unemployment and inflation theory. The extended Philips’ curve is expressed in the following formula5:

This formula means that inflation () is inversely proportional to unemployment, but it also depends on the inflation expectation (). Despite price reduction tendency established in the context of the world financial crisis the above mentioned expectation is stipulated by the insufficient value of the total international reserves in our country (that was 1 335830.4 thousand US dollars by the January 1, 2009) that is used to keep the currency rate.
Therefore, the macro economical regulation in Georgia both in employment sphere and monopolistic segment of economy do not have favorable results even though growth rate of the prices is slowed down by the inflation regulation.
It should be stated that there are short-termed economy regulation methods which means manipulation upon the joint request and aims to create economical environment for the short period of time. One e of these methods envisages reduction of tax rates and increasing of social expenditures which has slight effect as initially the unemployment decreases but later inflation increases and the unemployment rises.
There is another method of manipulation upon the joint requests which uses the strict budgetary policy that is accompanied by the high interest rate; that causes rising of economy growth rate and slowing down of the inflation expectation though unemployment increases beyond the threshold level. Then the whole circle is repeated – tax burden decreases and costs increase, but in the long-termed period the effect is inflationary.
The short-termed economy regulation methods were applied in Georgia as well in particular recently; anti-inflationary activities carried by the National bank were accompanied with the activities of nonmonetary origin of the strict budgetary policy that in 2007 were expressed in:
a) increasing of payments for the communal services:
b) in order to reduce the on-budget expenditures, redundancy of the staff working this sector;
c) annulling the social privileges for some layers of the population and tariff rising on the public transport;
The strict budgetary policy was changed by the increasing of the on-budget expenditures by 2008; the following was implemented in particular:
a) financing of entrepreneurs who were ready to participate in three months program of the unemployment;
b) increasing teachers’ salaries;
c) distributing vouchers on gas and electricity to the families with low incomes;
d) increasing salaries to the staff of the Academy of Sciences;
e) increasing financing of the museums and libraries;
f) financing of short-termed students’ labor programs;
g) Increasing number of people below the poverty line and allocating the state support to them.
Maneuvering between economically necessary activities and politically feasible ones plays the special role in development of the economical policy of government. Not short-termed, but permanent long-termed state regulation process is crucial in condition of recession of economy by simultaneous participation of both budgetary-financial and monetary policies which have more effect on demand than separate application of one of them; though high quality of regulation can be achieved only by stimulation and support of development of the real sector of economy.