Evgeni Baratashvili Doctor of economic sciences Full Professor, Georgian Technical University Head of the Department of Economics and Business Management Davit Baidoshvili PHD student, Georgian Technical University Office of Chief Prosecutor of Georgia D
Southern Caucasus, as economic space, should be presented as complex territorial production-economic system.
Each of its elements should be studied individually, defining significance of each of them, as well as their place in the entire system. Provided that the analysis is conducted with the proper approach (combination of systematic and situational approaches, regarding specific nature of each aspect of the problem) the situation could be effectively assessed, providing basis for adequate identification of the principles, mechanisms of formation of the entire system, the environment for its effective operation.
Southern Caucasian region should be regarded as the part of world economic system, territorial segment of the world market. Therefore, complex study and activation of economic potential of Southern Caucasian Region is of ke significance. Industrial natural conditions of the region conditioned more or less complex nature of the economy of each country, relatively high level of specialization and concentration, objective preconditions for deepening of the integration processes. There takes place oil, coal, chemical industries, ferrous and non-ferrous metallurgy, electrical engineering, light, food products’ machine building, subtropical farming, health resorts and tourism industries etc.
Thus, current level of development of the production forces, territorial-economic links, could be regarded as one of the most important factors for deepening of the economic integration processes. Against the background of such preconditions we should assume that improvement of territorial-economic links will be provided in four directions (levels).
First direction (level) – formation of the domestic markets of the countries of region (Georgia, Azerbaijan, Armenia). Thus will rely on the conception of formation of the market economy in the country, respective money & credit, tax, customs, industrial, agrarian policies etc. On the basis of the market relations the economic complex of each country will be formed preparing proper material and organizational basis for development of the integration processes at higher level.
Second direction (level) – integration processes for creation of the economic area of Southern Caucasus will be developed. Rationalization of the existing territorial-production links, primarily, requires concerted coordination of the respective territorial units (countries) in the sphere of production forces development and movement, existing economic links and traditions should be taken into consideration.
Azerbaijan supplied natural gas to Georgia and Armenia, oil – to Batumi factory, iron ore – to Rustavi metallurgic enterprise. In addition, Azerbaijan supplied to Southern Caucasian republics the oil products, products of chemical, machine building, hydro-technical and other industries.
Georgia exported to Azerbaijan and Armenia rolled ferrous metals, steel pipes, ferrous alloys, coal, mineral fertilizers, metal cutting equipment, trucks etc.
Armenia supplied to Azerbaijan and Georgia the chemical products, metal-cutting equipment, electric engines, instruments, transformers, cables etc.
Even this incomplete list of mutually supplied products clearly shows proportions and levels of development of the production forces, territorial labor distribution, as well as specialization directions in Caucasian region.
Structure and intensiveness of the new economic-territorial link in Southern Caucasian region depend on level of economic development, peculiarities, tradition, economic experience in each of these countries. This is the basis for objective selection of the common interests providing reasonability of deepening of the economic relations between these countries, e.g. common railway, marine, road transport communications served the Southern Caucasian countries. Note that they had common soviet conception of management of the economies. The enterprises and organizations were directly linked with one another in economic, technological and in some cases – even in organizational respects, comprising the subjects composing the common economic complex (metallurgical, chemical etc.). Therefore, economic thinking in these countries was almost identical. In addition, in the recent years, causes of crises of the national economies in the recent years, depression processes, socioeconomic outcomes were almost similar, having common signs. Mentioned characteristics, common features of the production-territorial relations, substantially determine the strategy of market economy development in each country.
What will be the advantages of functioning of Southern Caucasus region, as economic area?
The most complicated socioeconomic problems, e.g. development of energy sector on the basis of local resources, will be solved in complex and reasonable way. Because if non-homogenous distribution of the resources and scarce finances, it will be hard to effectively employ them by any of the individual countries, separately. And joint efforts would allow creation of the favorable conditions for functioning of the common system for complex employment and use of the energy resources. In addition, more reasonable solution of the problems of food production, scientific-technological progress, healthcare, environment etc. would be found.
Geopolitical potential as the strategic resource of the region will be effectively used, Actual basis for economic relations with the interested European and Asian countries, international tourism, trade development, investment activities, formation of the new type of inter-state relations, strengthening of the cultural and humanitarian contacts will be formed.
Through integration of the national economies, protection of their interests, on the basis of multilateral relations the joint ventures, organizations, finance, credit structures will be formed; the process of production and science integration would further expand.
Against the background of strengthening of the integration processes Caucasian Region will become more attractive object and reliable warrantor for foreign investments. This is of critical significance for acceleration of overcoming of the crisis situation by the countries. Currently, no one of the Caucasian countries have any actual sources of investments. External financial injections are required. I.e. the investments should be made by the other countries and one of the most important conditions for this is political stabilization. In addition, its level greatly depends on sound economy.
Development of the integration processes on the basis of socioeconomic conception in Southern Caucasus would prepare objective preconditions for creation of Caucasian regional model of market relations. It will be neither American, nor Swedish and nor Japanese. It will be built on the characteristic features of Caucasian countries, work of their nations, experience, economy management, self-government, social justice, economic humanism and tolerance principles.
Southern Caucasus, as self-regulating economic area, will be able to join open international economic systems step by step, consistently, join to it its own potential, contribute the universal values formed by centuries-old traditions, which indeed has the good prospects. By this it will be able to stimulate further deepening of the integration processes and at the same time, take from the world economy what is required for complex, balanced development of the region and its countries.
Third direction (level) – strengthening of the economic links of Southern Caucasian region, on one hand with the countries of Black Sea basin and on the other – former soviet republics of Central Asia, Iran, Kazakhstan, China and other countries. In these relations the Europe-Caucasus-Asia transport corridor would play the central role. Distance from the Central Asia, in particular, from Tashkent, to Georgian sea ports is 2.000 km, while, to the other nearest sea ports – Bander-Abas the distance is 3.900 km, to St. Petersburg – 4.000 km, to Odessa – 4230 km etc. Such corridor would create single huge transport area, which would spread from the east, Chinese sea ports to the North European sea ports (Amsterdam, Rotterdam). The mainline railway would reduce railway transportation distance from the Pacific Ocean coast to the Europe by 4.000 km. The mentioned rout is 8.000 km shorter than the marine route through Suez Canal and 15.000 km shorter than the one via Cape of Good Hope. According to the Expert assessments, its launching would provide the source of significant profits for 30 countries.
E.g. transportation of 15 million tons of cargo from China to Europe would provide $3 billion annual saving. Investment attractiveness of the region would increase significantly, relations with the foreign partners would expand and this is the significant factor for activation of the country’s economic potential.
Note that eight former soviet republics, countries of Black Sea basin, China,. Iran, EU members are interested in this corridor. Desire of the countries of different continents, at different levels of development to construct Europe-Caucasus-Asian corridor with joint efforts, clearly show its strategic significance.
Number of key aspects of functioning of the future corridor should be discussed.
The ancient trade road, known as Great Silk Road served not only for exchange of goods between two continents but also contributed to changes in the sphere of culture. This function will be a significant factor in the future. Currently, Georgia, as an independent state, is interested in development of the transport infrastructure. It will develop objective precondition for inclusion of its economy into global integration processes. The mentioned corridor, with its significance, would greatly increase the scale of socioeconomic development of the country. Functions and scales of Georgian section of Europe-Caucasus-Asia transport corridor should be adequately assessed. The local conditions, peculiarities, national-state interests should be taken into consideration. This leads to necessity of differentiated approach to solution of the economic, technical-organizational and especially social problems. Not only corridor feasibility study should be prepared but the social aspects of the corridor functioning (expected results) should be assessed. In determining of the corridor scale together with the forecasts of cargo turnover data for Europe and Asia the potential capabilities of various transport arteries of the country (railway, road transport, oil and gas pipelines, air transport, marine transport) should be taken into consideration. Role and significance of each of them should be evaluated and common approach (in relation with the social problems) on this basis should be developed. Together with balancing of operation of the transport arteries the high level of organization of the customs, trade, baking activities should be provided and the other sectors of infrastructure should be adequately developed.
TRACECFA currently is regarded as the transition corridor, which, primarily, would supplement the existing European routes, in this context the opportunities of unification of the transport systems of Caspian Sea, Black Sea, Adriatic Sea, Mediterranean Sea. Solution of the energy transportation via pipelines is of similar significance. In particular, Azeri-Georgian route of oil transportation became one of the highly prioritized large projects in Georgia attracting significant foreign investments. Implementation of this project creates environment for more active investment into the other sectors of Azeri and Georgian economies, nothing to say about improvement of security in the Southern Caucasian region.
On the other hand, this project would have no future, unless the project of oil transportation from Azerbaijan via Russia, as in the conflict conditions, where the oil pipelines pass the “hot points” or places in their vicinity existence of alternate pipelines is decisive.
In economic context Azerbaijan and Georgia are not the strategic competitors and this could be explained by the fact that Azerbaijan has oil and gas and Georgia has access to ocean through the sea and it borders with Turkey. Each of them has its own, in many cases, unique production potential. This clearly shows that Azerbaijan and Georgia could not be regarded as the competitors rather they are strategic economic partners.
Georgia is interested that Caspian oil and gas were delivered to the west through its territory and this is the economic interest of Azerbaijan, as in such case, all cargos from the west to the east and vice versa would cross its territory.
At the same time, existence of inter-country economic competition between Georgia and Azerbaijan should not be regarded as the reason of absence of the market stimulus: these countries have the other competitor countries and these are the partners in inter-regional competition. Economic partnership of Azerbaijan and Georgia may become (what is practically proven at certain extent) some kind of “magnet” for attraction of the other subjects, not only from the Southern, but from the entire Caucasus (though, unfortunately, not all recognize the advantages of strategic economic partnership in the region).
We should emphasize that strategic economic partnership is the basis on which the economic system of Southern Caucasus could and should be built.
Analysis of the economic dynamics of Southern Caucasian countries is very complicated as geopolitical and geo-economic areas of three countries are interrelated, inter-conditional and inter-depending. Economic dynamics of southern Caucasus could be assessed by four positions:
First position – evaluation of compliance with Maastricht criteria and deepening of integration with European Union;
Second position – evaluation of the targeted nature of the economic processes for providing favorable conditions for life;
Third position – evaluation of macroeconomic effectiveness;
Fourth position – evaluation of development sustainability; at this position, it is important for us to determine how stable are the achieved indicators (outcomes) and whether there are proper preconditions in the country for future sustainable development of not.
1. In evaluation of economic dynamics of Southern Caucasian countries, primarily, one should take into consideration the desire of all three countries to join European Union and actual participation in European Neighborhood Policies Program. In such situation it is reasonable to discuss how well the Southern Caucasian countries comply with the criteria established for EU countries as per the Treaty of Maastricht. According to this Treaty target inflation rate is 2.5%, percentage of the national debt (as percentage of GDP) is 60%, state budget deficiency (as percentage of GDP) – 3%; long-term interest rate – 5.4%. In 2008-2009 Georgia was at the first position among Southern Caucasian countries by inflation rate, national debt, state budget deficit and long-term interest rate.
Among the established criteria inflation rate and long-term interest rate are the most problematic (especially for Azerbaijan and Georgia).
Regarding the fact that all three countries implement the politics oriented towards attraction of the foreign investments, compliance with the above criteria, in the nearest years will heavily depend on the quality of macroeconomic and especially on the money and credit policies, in the conditions of extensive capital inflow.
Currently, with respect of compliance with the Maastricht criteria, Armenia is at the best position.
Unlike Azerbaijan and Georgia, Armenia is in the zone of low inflation rate. According to assessment of the macroeconomic and especially money and credit policies implemented by Georgian monetary government will lead to significant problems related with inflation and generally, its macroeconomic stabilization in the nearest years. These problems are basically conditioned by the fact that the National Bank of Georgia has no adequate set of tools for implementation of the effective money and credit policies.
In the nearest future, for all three Caucasian countries one of the key objectives is development of the finance sector and increasing of the level of the financial mediator. Indicators of the financial mediator level are quite low in all three countries. E. g. ration of the assets of the banking system and GDP in all three countries is no more than 20%, complicating implementation of the effective money and credit policies in the low competition level and significantly hinders reduction of the interest rate.
What are the prospects of integration with European Union?
In economic respect, Tbilisi, as raw materials supplier or consumer goods market has no any strategic significance for Brussels, though Georgia is the connecting bridge for trade and communication between Southern Caucasus, Central Asia and Europe. Moreover, diversification of the energy resources’ supply is one of the key objectives of European Union and Georgia, due to its geographical location, is able to bypass the :unstable” countries and secure direct communication between Europe and the resources of Central Asia and Caspian Sea. Thus, Georgia can become one of the key alternative arteries. On its side, it strives to become the transit country for the purposes of profits generation and dealing with its energy problems. In addition, in the event of growth of the confrontation level, both, within Georgia and in relations with Russia, the investors may doubt that Georgia is unable to guarantee security of the pipelines strategically significant for the Europe.
In the economic sphere, EU is potential key western trade partner and source of the investment capital. From the date of its independence the TACIS program contributed transition to the market economy and its joining to the World Trade Organization. In addition, the food security program became the significant instrument in the spheres of management of the agriculture and the state finances.
Though, Brussels rejected Tbilisi’s attempt to accelerate creation of free economic zone between EU and Georgia. Formal reason for this is necessity of significant improvement of food industry standards and introduction of the special export certificates of common European form. It is clear that European Union is interested in Georgia as the transit country and partly, as the investment area. Though, EU is not interested in expansion of economic integration with Georgia, because of low level of economic development, absence of promising industries and natural sources of raw materials. It should be noted that relation of Georgia with European Union is one of the forms of dependence on the foreign countries, in both political and economic spheres. European Union, through expanding of the contacts with Georgia, attempts to increase its presence in Southern Caucasus.
European direction became one of the basic ones in the foreign policy of Armenia. Yerevan tends to incline towards Brussels, for the purpose of overcoming of isolation. Collaboration program within the European Neighborhood Policy is of great significance for Armenia, which implies moving from collaboration towards integration with the European Union in certain spheres. Recent reforms in the economic, social and legislative spheres, the process of economic liberalization, as well as stable economic growth clearly show that the course of Armenia towards European integration is not an ostentatious one. Trade and economic relations with the Europe are of priority for Yerevan. EU provides donor assistance to Armenia through such programs as TACIS, Food Security Program, financial assistance etc. Thus, additional financial assistance by the European Union, expansion of the trade-economic collaboration, harmonization of the economic legislation, regular reduction of the trade tariff limitations would contribute to growth of investments, development of Armenian exports and economy. It should be taken into consideration that main goal of Brussels assistance to Yerevan is re-orientation of its foreign policy towards Europe. Consequently, Russia has to actively participate in its economic life to maintain the level of political partnership with Armenia though no proper attention is paid to this sphere of relations.
We should note that in Southern Caucasus the largest economic project is implementing bypassing Armenia and hence, Yerevan makes steps to male close relations with EU to prevent isolation, as this would cause its economic backlog compared with its developing neighbors.
As for Baku, EU is interested in economic cooperation with Azerbaijan, as it is the energy supplier and significant transit country. Action plan within the European Neighborhood Policy provides for regular dialogue in the spheres of socioeconomic development and trade, with gradual opening of European market with Azerbaijan’s approach to the European standards.
Baku has achievements in the sphere of economic collaboration with EU countries. European Union became significant source of promising regional projects and investments. At the same time, the country maintains its self-sufficiency, by means of its energy resources and well-developed foreign economic relations, both, with the west and east.
European Union pays special attention to the relations in the sphere of energy transportation from Caspian Region to the Europe. It is clear that those, who control the energy resources and their transportation routes, set up the geopolitics. Currently Azerbaijan faces the choice: either to enter the western energy market independently, though with EU or act in close collaboration with Moscow. In former case the freedom of action will be greater and the later case – ready infrastructure, experience and investment support of the joint projects.
EU, through implementation of long-term TACIS, TRACECA, INOGATE programs sets as one of its main goals occupation of the dominating economic positions in Southern Caucasus, or freeing of the Region from energetic and transport dependence from Russia, what is regarded as one of the key objectives within the mentioned strategic goal. Indeed, integration of the Southern Caucasian countries into European structures can completely Oust Russia from this Region and development of TRACECA transport corridor would close its way to India, Iran, Southern Asian and other countries. EU desires to gain direct access to the promising Caspian oil-bearing region. If it fails to do so, EU would find itself in double dependence on energy supply: from Russia and from Caspian Region, though through Russia. And this would be detrimental to the interests of Europe, which attempts to diversify the sources of gas and oil import.
Unlike Europe, Russia does not intend to include Southern Caucasus into global geopolitical projects. It should be taken into consideration that collision of the strategic interests of leading world and regional players – EU and Russia could create conditions for accelerated political and economic development of Southern Caucasian Region and on the other hand, such rivalry could significantly increase already large conflict potential of the Region and therefore, Russia and European Union should be interested not in geopolitical rivalry but rather coordination of their policies in the Southern Caucasian Region.
2. Evaluation of Purposefulness of the Economic Processes for Providing Conditions Favorable for Human Lives
Life quality, according to official data, declared by the Southern Caucasian countries, is at the same level in all three countries. Analysis of some independent sources shows that the situation differs at certain extent. E.g. though the average wages and salaries in Southern Caucasian countries are approximately at the same level social strain in Georgia is more prominent as the poverty level is higher compared with Armenia and Azerbaijan.
In Azerbaijan, according to some sources about 1 million people are unemployed, what is significantly higher than the formal unemployment rate.
Armenia and Azerbaijan are far behind Georgia, with respect of access to information technologies for wide population.
3. Macroeconomic Effectiveness of Economy Functioning
Third block of indicators characterizes effectiveness of the Southern Caucasian economies, or, in other words, how effectively the states are arranged.
In the recent years, all three countries show high rates of economic growth. Analysis of export and import structures in Southern Caucasian economies lead to the significant conclusion: for all three countries the key export items are the raw materials.
For Azerbaijan this is oil and oil products, for Georgia – basically ferrous and other metals and wine products, for Armenia – cheap metals and food products. In the export structures of all three countries there actually are no any goods of complex structure revealing the low level of application of high technologies in production. Though, one may state that Armenian exports are more complexly structured and diversified.
In Armenia and Georgia, unlike Azerbaijan, where he import items are related to oil extraction sectors, import structures are more complex.
Characteristic feature of sustainable development is evaluation of inter-republic integration processes. Earlier the integration processes commence in Southern Caucasus, higher will be realization of the potential of each country.
Reasons causing globalization, for the Southern Caucasian Region and its countries, basically, could be presented as follows: fist. it is necessary to clearly understand globalization and reasonable and balanced approach to it. The substance of globalization, in all dimensions and attitude towards globalization should be unambiguous; we should recognize that globalization is the best way for economic growth and development.
Globalization allows the countries of the Region (and Georgia among them) to adapt their national economic strategies with respect of globalization dynamics, tailor their economic strategies regarding development of European and Asian regionalism development, as well as integration processes at all levels.
Third: this is the issue of protection of the national goods production in Globalization conditions, requiring very careful and balanced approach. No situation should be created where Georgia, for example, misses the opportunity of gaining profits, say through participation in the liberalization processes in the Asian Economic Union. For the countries of Southern Caucasus and specifically for Georgia the policies of interaction with the world market stimulating improvement of the products quality and technologic level by local producers through liberalization, equalization of the rules and standards of trade and investing is most favorable. In this context, membership of WTO is within the interests of Georgia and other countries of the Region (Georgia is WTO member for few years).
Fourth: how the opportunities of many-sided relations with the EU and Asian region could be used for the benefit of the Southern Caucasian countries. Adequate response to this challenge is relayed with the objective of adaptation of Georgian, Armenian and Azeri economics with the global environment.
Fifth: how could be used opportunities of integration and collaboration of the Western Europe and Asia for security of Georgia and other countries of the Region and for avoiding the danger related to emergence of world financial disturbances, spreading of electronic trade, trade liberalization and investments in Asia.
Sixth: how, through international efforts, revive scientific-technological potential of Georgia and how it could be used in the context of global and regional knowledge. Effective response to all challenges of globalization is decisive for dynamism of economic development of Southern Caucasian Region and Georgia in particular. Therefore, this circumstance should be necessarily taken into consideration in development and implementation of economic strategies of the countries of Southern Caucasian region and Georgia among them.
Currently no one doubts that in the current conditions of economic globalization successful development of any country could not be achieved without relations with the world market and coordination of domestic economic and financial policies with global and regional leaders.
Western orientation of Georgia, as a national state is widely known. Though, interests of the country and Southern Caucasian Region require development of separate strategy for relations of Georgia with the Asian regions. The reference point, in this case, should be the approaches implying that the mechanisms for matching of interests should not be identified forever; they should have some space for maneuver and they should change depending on the external situation and socioeconomic status of the country and therefore, for globalization of Georgian economy and adaptation to Asian regions, regarding the above mentioned, we regard that strategy of economic development of Georgia should rely on “two legs” of economic globalization, what implies European way – integration with Western Europe and Asian way – integration with Asia, To avoid the errors in the relations with Europe and Asia, in identifying the place of Georgia, in our opinion, the two levels, two types of views of Georgia should be employed. The first one is the view about Georgia, in general, as a participant of global, world economic and political processes and the other, about Georgia, as a country located in the geo-economic and geopolitical area.
Such two-type, two-level approach, with respect of place of Georgia in the modern world allows seeing proper and correct position of our country in relations with Europe and Asia, relations with the countries of European Union and those of Asian Region Union. Such approaches would show the role, image and position of Georgia in two dimensions – global economy and regional economy. Currently, global nature of Georgian economy is quite modest by the reason of heavy and prolonged crisis and includes cargo transportation, which, in the nearest future, will significantly grow, after launching of Baku-Tbilisi-Ceyhan oil and gas pipelines.
This provides basis for the significant conclusions: Georgian socioeconomic development conception should take into account, in addition to European and American factors the Russian factor as well and therefore, Georgian strategy should be built based on dual condition – with respect of global economy and regional economy. We need the policy and mechanisms for its implementation ensuring regional interpretation of the global interests of Georgia and global vision and understanding of the subjects of Southern Caucasian Region in the given part of the world. Substance of our vision is that the global and the regional should not be opposing but rather supplementing one another in concert, in the process of development and implementation of the strategies by Georgia. For further refining of this issue, we would note that Georgia, within the borders of Southern Caucasian Region, should ensure dramatic strengthening of globalization with Asian region and regionalization processes.
Georgia and entire Southern Caucasian Region can develop to certain level based on the European factor, without wide collaboration with Asian region but, at the same time, this would lead to certain losses for our country and the entire region, primarily with respect of such economic concept, as lost opportunities and profits.
Strategic goal of Georgia, in relations with the Asian region, is to become the link connecting European and Asian regions in economic, financial, communication, cultural and civil respects. Active participation in economic and financial integration should be the medium-term prospects, in relations with the Asian region and the short-term goals are related to development of bilateral relations with the neighboring countries, countries of the Central Asia and others.
Thus, with respect of regulation of the problems in Southern Caucasian region we consider number of approaches. First approach implies consideration of the issue of possibility of general economic and financial integration of the Southern Caucasian Region. In the future, it could be reasonable to introduce common Southern Caucasian currency and development of the conceptions of common market.
Second approach considers the economy of Southern Caucasian Region as common economic and financial space. Though, simultaneously, we regard the mentioned Southern Caucasian space nor as a phenomenon opposing to Western European integration but the one, which, in the future, will be able to create the EU-type regionalism and the one, which, in the further perspective, would become the element of the common world market.
Third approach is based on staged development of Southern Caucasian economy integration. Aspiration towards integration cooperation could be clearly seen in the region of Black Sea countries.
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