ABOUT THE MODEL OF ECONOMY SUITABLE TO GEORGIA

prof. N. BAKASHVILI, dr. D. MESKHISHVILI

Market model of economy will not be efficient unless it is regulated by the state. This is testified by the world history of market economy development.

The primary and earlier model of market economy that came into being in the 19-th century in the countries with capitalistic system of economy, is a natural and historic process. This model is characterised by free market relations. Deregulation is optimal for the process. Its principal regulator is market mechanism or, according to A. Smith, invisible hand of market. Today it is already history. This very invisible hand and neglect of state role in entrepreneurial activity and economic control in general led these countries to crisis that could be averted only via government aid. However, these countries were pioneers in market economy. There was no way out then. Now that this experience became obvious, transition market economy countries of Latin America, Asia and Europe have no right to ignore the experience, mistakes and achievements. Nor Georgia has this right. True, countries with developed market economy have not transited to market relations from administrative-command economy as it was in Georgia, but this does not have principal importance. The important thing is that both the countries and Georgia started to form democratic state and appropriate market relations from nothing. Thus, Georgia can use their experience, avoid repeating their mistakes and achieve quick results.
Therefore, in transition to market economy state interference in business competition is inevitable. Yet a question arises: what a competition and optimal parameters of state regulation should be like ? What is the role of state in transition economy – unimportant, moderately active or active?
The level of state regulation in economy is determined by the correlative distribution of excess production between enterprises and state. It is correlation between revenues of enterprises and taxes they pay to state. For instance, T2 identifies excess production in the country. It will become clear that T = T1 + T2. The correlation T1:T2, i.e. correlation between competition polar and state regulation polar can be polyvalent. If the amount of T is 100, then the number of these variants (models) will be 100, among them two – initial and final – will be extreme variants with the average one being medium.
These variants are given in diagrams 1, 2, 3. They show different levels of state regulation. T in the diagram identifies centre of their correlation.
Diagram N1 shows primary, early market economy model when the whole excess product is left in the enterprise (T1 = T, T2 = 0). At this time, state does not have resources for regulation of enterprise, competition dominates, price formation and state is free or as A. Smith says, it performs the role of “night watchman”.
Diagram N2 reflects contradictory situation of the first diagram (i.e. another extreme) with the whole excess product being at state disposal (T2 =T, T1 = 0) as a result of which state regulation of economy becomes absolute. In fact, it is directive-command economy common to the Soviet Union. At this time, enterprises do not have funds for real independence. There is no competition.
Diagram N3 shows “50:50” model. According to this model, 50% of excess product in the country remain in enterprises, the rest 50% are transferred to state. It is called equal model (T1 = 50%, T2 = 50%). This model now dominates in developed countries (with certain deviations), for instance, in the US (T1 = 55%, T2 = 45%), Sweden (T1 = 44%, T1 = 56%), China (T1 =43%, T2 = 57%), etc. Yet there are countries (f.e. Korea, Taiwan, Turkey) with greater share of enterprises in excess product – almost 80%.
As economic development model of society is much determined by scheme of excess product distribution, we should not be misled by the illusion that changing this scheme is easy. On the contrary, it is a contradictory and difficult process. A state always needs great funds (for the financing of army, policy, administrative agencies, ecological measures, culture, art, scientific discoveries, etc.), and tries to raise these funds via taxes. It is its share in the excess product of the country (T2). Yet there is a certain limit in taxes. Otherwise entrepreneurs might go over to shadow economy and even close their enterprises. This gives rise to contradictions between the government and enterprises. Thus, change of the above-mentioned excess product distribution scheme is not so easy.
The same situation is in Georgia. 50% of its entrepreneurs (with the exception of 70%) work in illegal sector because entrepreneurs have only 15% of excess product in the country with 85% coming from enterprises in the form of official and unofficial taxes. This leads to discontent, apathy and distrust towards the government.
More than 200 changes and amendments have been made in the tax law of Georgia, but still they are not acceptable for entrepreneurs. Former finance minister of Georgia said the following in the forum devoted to the improvement of Georgian tax legislature: “No one should think that tax code is a stimulating document, it is a fiscal document”. Such way of thinking is destructive for the country. The tax code should mainly be aimed at the encouragement of entrepreneurial activities. As a result of it, the tax base will increase and expand, and the fiscal function of the code will be performed. Unfortunately, ministers change, but the tax code still remains a fiscal document.
On the other hand, when considering this issue from the viewpoint of state, we will see that the state has a catastrophic shortage of monetary funds so that it has to make accent on short-term efficiency (encouragement of entrepreneurial activities would not provide it with such an effect). Thus, a close circle appears: how can the Georgian government raise funds for the financing of state measures if it reduces taxes, and if it does not, how will entrepreneurs pay them?
It is difficult to give an unambiguous answer to the question. A certain international agency should be formed in the world. This international agency would develop an optimal model of economy for each country undergoing transitional period as many factors should be taken into account while creating this model. Thus, this work cannot be done by one or two scientists.
Despite this, our present supposition about this issue stops at an almost equal variant of product distribution. This variant is “60:40” (T1 = 60%; T2 = 40%)
Model of excess product distribution 60:40.
This model can still work in Georgia despite it being late. In this case the national budget will receive 40% of excess product in the country instead of 85%. This will, certainly, be a great blow for the small budget of Georgia, but this process will not be so poignant if this measure is realised in phases.
We think that in the first phase taxes should be reduced in small enterprises, as their share in tax revenues of budget is not presently large. Tax reduction will cause legalisation of small enterprises and provide stimulus for the establishment of small enterprises; the present small enterprises will strengthen financially and launch the process of profit reinvestment. This will provide budget with revenues that will be enough to cover damage from tax reduction.
In the second phase priority should be attached to tax reduction in mid-size and large enterprises. This phase will begin as soon as the first measure will produce results (tax base of small enterprises will expand and their share in budget revenues will grow).
In this case, damage from tax reduction in mid-size and large enterprises will be covered by taxes from small enterprises. These encouragement measures will not cause any damage to the state.
The economic model proposed by us is based on 60:40 distribution of excess product. It will help the country to reach civilised market relations.
Our proposal is not abstract. It is based on Chinese example. Already in 1986 enterprises in China gained 43% of profit (to compare: in 1978 this figure was 3-4%). This helped them to completely solve the problem of self-financing and led to quick technical progress and production of a whole number of goods (electricity, television, cement, cotton fabric, etc). China has reached greater success now. It has managed to do so by means of product distribution (43:57) model.