REFORM AND SOME RESULTS OF TRANSFORMATION

ALEXANDER TSERETELI

The 20th century, especially the last decade is characterised by acute social-economic and political events, valuation adjustment, polar change of paradigms, which manifested itself in the disintegration of the socialist system, formation of new sovereign states and the objective necessity to pass through the transition period.

Linwood T. Gaiger, professor of international economy says: “No one would forecast the miraculous changes during the transformation that gave rise to many new states, institutional and economic problems”. It is clear that this estimation is connected with the radical economic reforms in Georgia in 1989-2000 during the “new transition period”.
Some results of privatisation: privatisation of enterprises and property is one of principal directions of current radical economic reforms in Georgia. Privatisation of enterprises and property is inevitable in post-Soviet Georgia that has entered the path of forming sovereign democratic state and new economic system since the 90s. Here there are ongoing processes of market relations development. Experience of many countries shows that privatisation is a political process with economic results, that privatisation was performed successfully by the countries that managed to overcome “political difficulties”, – Roland Ath, one of foreign authors said, and we cannot but agree to this.
Privatisation in Georgia has started in March, 1993. Privatisation processes in the national economy of the country were quite complicated. It would be objective to mention that it is very difficult to solve acute social-political and economic problems at once in the country that recently declared independence. Each country would find it difficult to do so. These difficulties obstructed economic reforms and in particular, property privatisation process in Georgia – a country with weak economy. Despite this, the process became a large-scale one. (Table 1).
As you can see from the table, the greatest specific weight of the whole number of privatised objects in Georgian national economy by January 2001 falls at the share of trade and social service objects, which equals 34% and 44,5%. We could not say the same about entrepreneurial sector (19,6%). The privatisation process of mass, mid-size or large enterprises seems to be quite difficult in our country as well as in other countries (Russia, for example). The mentioned process is much dependent upon well-off investors and shareholders. The total number of 1312 mid-size and large businesses or 98,4% have been transfered into joint stock companies (table 2). As you can see from the table, the greater number of joint stock companies is formed in agricultural, food, construction and architectural sphere as well as in industry. Years of economic stagnation (1993-1995) have left a trace on the transformation process of public property. One of its clear examples is industry. True, the process of enterprise privatisation in a whole number of industrial branches makes progress, but the great part of state-owned property, especially shares of large enterprises have not been purchased even now.
The privatisation process entered a new phase in 1997.
On 30 May 1997 the Parliament of Georgia passed a law on the privatisation of public property”. At the same time, on 28 December 1997 the President signed the “single plan of 1998-2000 on the privatisation of national economy in different branches”. The plan-programme provides main directions of further privatisation process in accordance with the most important branches of country’s economy.
Structural changes: the growth of privatisation scales in the national economy in 1993-2000 have had an effect on the correlation of property forms. According to official data, presently public sector produces more that 70% of country’s gross domestic product (without VAT and tax on shares and import). Private sector dominates other sectors of economy besides construction. Change of property relations in the national economy, the comparatively quick rate of some priority branches development as well as other factors led to significant changes in branch structures of economy (table 3). The table shows the upward trend of the specific weight of intangible production spheres and the downward trend of the specific weight of material production. The high specific weight of basic branches – agriculture and trade and the low specific weight of industry and construction is especially noticeable in the branch structure of economy. Work on privatisation, different kinds of information has manifested the need of scientific study of the current problems concerning transformation of large enterprises into joint stock companies. Despite the success in small privatisation sphere, the final results of privatisation can be assessed only in the context of large enterprises privatisation. There are also problems in the corporate leadership of joint stock companies and participation of wide public in shareholding. Mass shareholding, distribution of vouchers seemed to have encouraged the formation of shareholders’ layer. However, this process has not acquired necessary scales due to some reasons: for one thing, securities market does not function in the country, owners of joint stock companies and investment funds, members of supervisory council are not competent enough to control enterprises, and the population does not have experience in participating in corporate management. Thus, investment attraction of enterprises is quite low in transition period.
The above-mentioned scale of public property privatisation as well as voucher privatisation has led to the change of population’s property qualification. Today state and well-off layers of society, other groups of people (directors of former socialistic enterprises, businessmen) became owners of the greater part of property. After privatisation of vouchers the majority of population received only a small part of public property. Most hard up people had to sell vouchers for a mere song and went over to poverty layer. Part of population has placed its small part of vouchers in “investment funds” and other enterprises and now they wait for the transfer of shares to their accounts. Because of incomplete capacity and non-profitability of many enterprises, the latter cannot transfer sums to the mentioned funds or shareholders’ accounts. There can be no talk of distribution of dividends among shareholders. Placement of privatisation cards (vouchers) in investments and its perspective result are sharp social issues for the population affecting interests of thousands of people.
We took an interest in the work of one of investment funds, JSC Mtavarinvest. The matter will concern the study of the efficiency of social functioning. The study has revealed the following: JSC Mtavarinvest was formed on July 19, 1995. Its founders are 36 legal and natural persons. Founders’ capital contribution totals 29 thousand dollars. In 1998 there were 2130 shareholders in the mentioned JSC. Its capital was 469,7 thousand laris. 71,1% of the sum falls at the share of vouchers or 11136 population’s vouchers. The mentioned money capital is invested in 25 JSCs and enterprises of the country in the form of shares. The payoff of investment funds is determined by the profit amount of invested enterprises transferred for JSC Mtavarinvest as dividends. Of 25 joint stock companies that the investment fund has concluded agreement with, in 1995 the only one to transfer 171 laris to the account of Mtavarinvest was company Spageti-94, in 1996 mill factory of Poti transferred 5273 laris and in 1997 five enterprises transferred 23350 laris. The rest 20 enterprise cannot transfer sums because they do not function and are, therefore, insolvent. Owners of Mtavarinvestor think that timely work and transition to profits regime is a necessary condition for receiving dividends from an enterprise. No one controls the existing unfavourable conditions. The similar situation is observed in the rest five investment funds that function in Georgia along with Mtavarinvestor. The owners of JSC Mtavarinvest think that dividends can be distributed among shareholders after putting invested enterprises into operation, converting them to the profits regime and transferring sums to the account of Mtavarinvest. According to the existing data on transformation processes, the economic growth rate of the country has not been stable in the years under study, especially for the last three years. Despite this, in 1996-2000 inter-industry proportions changed significantly (see table 3).
Industrial forces of transition period.
For the last ten years (especially in the initial stage of building a new sovereign state) country’s industrial forces inherited from the socialistic system, suffered a great decline in the former USSR as a result of break-up of many years’ economic ties between the republics. This led to the complete isolation of the country, depletion of resources. Many workers have lost job due to the lack of state order, which finally led to mass unemployment.
The mentioned process of isolation have become even more acute after economic reforms – restructuring and privatisation of enterprises, liberalisation of trade economic relations between countries, i.e. collateral change of economic relations and work within the country, isolation of industrial production and breach of normal functioning. In the passed period, the transformation of social-economic structure led to mass structural and frictional unemployment, disqualification of qualified employees during the lengthy job-seeking period by means of chain reaction. Dozens of educational establishments has no longer trained highly-qualified specialists. As for means of production – labour tools and other labour means and main production funds of national economy have become outdated constituting a danger of technological accidence. Many non-perspective enterprises were liquidated, many of them are in need of renewal of technical base, introduction of new technics, progressive processes and new competitive production.
Hundreds of industrial enterprises do not work with full capacity. A great part of privatised and joint stock enterprises do not work at all. Small and middle size enterprises have faced many difficulties during their work due to state’s neglect of national production, wide-spread import of contraband goods and falsified production. Yet, democratisation of civil society and formation of middle layer in the country is much dependent on their successful performance.
Production relations in the transition period
Production relations in the transition period as well as production forces have significantly changed, production decline has been followed by the reduction of production relations. Presently, these relations represent an adequate form of deformed production forces that undergo transformation process. A great part of country’s public and non-public property (in the form of enterprise production forces) does not function. This means that in social production labour resources are detached from production means, which obstructed the normal process of material values reproduction. Concentration of a great part of privatised property in the hands of well-off layers led to unequally of different social groups. The rich now own approximately 70-80% of the privatised property, while the poor – 20-30%.
The principles and forms of exchange and distribution have changed significantly, too. The exchange is based on the mechanism of market economy. The private sector has reduced public sector. As a result of it, macroeconomic processes are in need of purposeful control and state regulation. As far as we can see, the dialectics essence of industrial forces and production relations in transition countries has the same content (industrial forces) different from dialectics form (production relations) and its dependence forms. This requires a reasonable analysis. This would help to avert the prolonged economic crisis and, perhaps, social explosions. Radical reforms in the country have been performed from upper levels. Economic system of Soviet Georgia has been dismantled by upper echelons. That is why, the executive power should bring the reforms to the end, regulate and control social-economic processes, form and balance industrial forces and its social-production relations in the country. With this purpose it is necessary to make a scientific analysis and estimation of the peculiarities of transition market economic system. In order to become economically independent, theoretic and methodological problems should be studied in close relation with the current practice of country’s construction with the help of economic science. All this should become reflected in the scientifically confirmed national ideology, development of economic and regional policy and practical implementation.
Pyramid of reasons: as mentioned above, during the years of economic reform, transformation of public enterprises into joint stock companies and privatised enterprises has significantly changed the social-economic structure of economic branches. However, efficiency of this transformation is very low, which is reflected in petty social effects, inertia of privatised and joint stock enterprises, high unemployment rate, non-formation of middle layer of population, weak competitive environment, negative external trade balance, growth of corruption scales, non-implementation of sequestered budget, etc. The life standard of the major part of population in the country (as well as in Tbilisi) (which is caused by hunger, lack of electricity and gas in winter, cold houses, etc) is so low that it cannot even withstand criticism. Part of the poorest layer of population is psychologically ill, because this part of population was unable to find an appropriate job in the country. Hardship has caused demographic potential reduction, deterioration of situation, premature death of infants and old people, growth of waifs and strays and de-population.
The society is well aware of the problems of transition countries: economic independence, settlement of global external issues, regulation of regained territories and other difficulties that are a burden on the country. However, this policy should not be pursued at the expense of suppressing person’s dignity, breaking human rights and ignoring genetic requirements of physical survival. Such social policy damages country’s image, it is destructive and immoral.
Presently, Georgia holds the last place in the world by the life standard of 90% of Georgian population. Approximately 600 dollars of Georgian GDP in 2000 fall at the share of population per head, which is the lowest figure. It is noteworthy that the similar figure in USA reaches 28 000 dollars. Despite the past insignificant moves in social sphere, the major part of population was beyond poverty level: a person spent less than 2 dollars per day. It is noteworthy that the real human income has not even reached half of the subsistence level. Namely, in December 2000 the normative minimal salary was 45,5 laris for one employee in a family with four members. Yet, according to the norms that has been in force up to the present, the subsistence level was 1145 laris for employable population.
The official data reveal the fact that population is differentiated in accordance with consumption in domestic economy. In 2000, consumption in the city was 326 laris per month in the most well-off fifth group of five quintile groups, it was 42 lari in the poorest group. In new manuals of economic theory we come across many new notions and categories, graphics including “pyramid of reasons” that consists of three interconnected reasons (see graphic);
1. Social well-being at the top of pyramid;
2. Social-political purposes (freedom, social order, country’s security);
3. Purposes of economic policy (country’s stability and economic growth).
If we compare these reasons and our real life, we will see a great difference between them. Yet, almost no purpose was performed by the tenth year of country’s transformation. There arises a logical question: what is the aim of social-economic reforms of such scale in our country? One receives an impression that the development of economic reforms in our country is unstable without any strategic route passing in the conditions of neglecting country’s main social purposes, low level of state control over transformation processes and macroeconomic regulation.
The main reasons of inadequacy or low efficiency of current economic reforms in transition period are as follows: administrative and territorial unsettlement in the country, i.e. loss of territories with appropriate results; vague model of building new sovereign country and perspectives of its social-economic development, i.e. vague model of receiving final results (namely, the country has no scientifically confirmed, transparent state economic and regional policy); the state control agencies express no willingness to analyse the most difficult transformational processes of transition period and reasons generating them, which invariably leads to chaotic development of a country. The role and importance of economic science is neglected during the construction of country’s national economy. It is late, but yet it is inevitable to make a deeper analysis of current industrial forces of the country, social-production relations, and changes during the transformational period. Do they correspond with each other? It is necessary to make appropriate conclusions, to develop offers and recommendations on macroeconomic control and regulation of the mentioned events and processes.
The analysis of current reforms in Georgia reveals the fact that transformation of social-economic structure in the country and its regions and completion of the processes will not be performed chaotically. At the same time, international labour division, the on-going world integration and globalisation processes set completely new tasks for our country. The existing reality, social-economic system of the country, formation of industrial forces and adequate production relations should be based on the deep scientific, theoretic and methodological grounds, on the highly-qualitative control and macroeconomic regulation.