კონფერენცია

∘ Davit Aslanishvili ∘
GEORGIAN ECONOMY RETROSPECTIVE: FROM THE SOVIET PLANNING TIME TO THE TRANSITION

Annotation. An article has described the transition of Soviet Type planned centralized economic system to market economy, its obstacles, view, and reforms. A complexity of the situation and a speedy implementation of reforms call for a thorough analysis of Georgia's social and economic stances and a research into the causes and peculiarities of the crisis, on the one hand, and a formation of an effective macro – economic policy, on the other. The objective of the research is an analysis of Georgia's social and economic stances and a subsequent definition of individual directions of macro – economic policy for the foreseeable future.

Keywords: Market Economy, Planned economy, Georgia, transition, Mentality, Soviet Economy, Economic Crisis.

Georgian Economy Glance: from the Soviet Planning time to the Market Transition

Since the dissolution of Soviet Union, Georgia is experiencing a historic transformation of a transition from the planned centralized economic system to market economy. The transition, meanwhile, is accompanied by a deep, lasting and an overwhelming social and economic crisis.

The aim of each and every economic reform is raising living standards that, to a large extent, depends upon well – calculated micro and macro – economic steps, a variety of measures taken thereby referred to as human psychological factors. Therefore, the research deals with human – state relationships and the part they play in an overall development of the country. The ways through which ever increasing social requirements can be met in an environment of limited resources have always been the main subject of economics. Social welfare (wages, prices, an abundance, stability etc.) is a chief determinant of a viable macroeconomic policy.

An extent to which a person reveals himself largely depends upon his/her receptiveness of universal impulses serving as an impetus to his/her existential, sensual and mental origins. Thus, an entirety of human existential, sensual and mental resources, with their combinations and assignments ever changing, nevertheless, remains within the boundaries of a person's consciousness. A pattern of the forms is a natural process and a necessary condition of a social balance.

An economic policy of a centralized management system was and is limited to commands and instructions, with macro – economic guidelines (laws) hardly taken into account. As to an open and a free system that market economy relies upon, it calls for an interaction of individual economic subjects (enterprises) determining an overall economic policy.

The subject of macro – economy is the links among economic processes to which end a development and functioning of a country's economy is essential. A significant trait of this kind of an economic arrangement is an indirect influence of a s state upon a socio – economic development of a country. The chief functions of a market economy are as follows:

an encouragement of an independent social development;
a sound law – and – order situation;
an external and internal security.

An unconditional and a persistent fulfillment of the foregoing functions determines a market economy level of a country. The chief economic goals of a modern state are as follows:

securing an economic growth of the country;
employment;
price and a national currency stability;
a foreign economic balance.

The following peculiarities and characteristic traits of a country play a significant part in its economic development:

an economic potential formed in a historical perspective;
a model of its socio – economic development;
the level of a country's socio – political development and its institutional structure;
national mentality;
The concept of leadership.

National mentality is an entirety made up of individual national psychological factors. It should be said here that in the South, for instance in India or Africa, a human vitality and a personal interaction with the universe form a significant factor, as against time that is hardly viewed as a sort of a limit or a restriction. (Aslanishvili, D., & Omadze, K. (2023). THE EVOLUTION OF THE ESSENCE OF HUMAN MATERIAL LIFE–FROM ANCIENT ROME TO THE MODERN WORLD).

In North America and Western Europe, meanwhile, meeting a challenge and making accomplishments is of foremost importance and essential for a person that does not associate them with experiencing positive emotions. This kind of a social mentality attributes plenty of significance to time.

Placed within this context, Georgia may fall into the category of southern countries, given the following peculiarities characteristic to our society:

an insignificant inclination to rationalizing;
a striking strives for a spiritual and an emotional aspect of life;
a certain irrationalism revealed by a dislike of planning and a creation of an unstable environment;
an indifference to initiative characteristic to a bigger part of the population;
an inclination to coexistence and collective pass – times (festivities, get – togethers etc.);

Public mentality affects a country's economic policy and its macroeconomic parameters. Italy of the 50's is a curious instance thereof, with a budget crisis and a mass tax – evasion being the most striking features of the period. The government had to resort to heavy fines, an installation of cash – boxes and checking up the purchased goods through receipts. Italy has no clear – cut leaders, that accounting for a frequent governmental change, and its economic backwardness as against the other western countries.

The situation in Germany, with its leaders, such as C. Adenauer, W.Brandt, G.Schmidt and H.Kohl used to be and still is, quite a different one - a steady economic development and a stable economic course unaffected by interior policy changes. (V.M. Sokolinski "State and Economy". Moscow, 1997, Finances and Statistics pp.30 – 34).

Macro - economic policy involves a regulation of a country's economy, with solving the following tasks viewed as a final objective:

a stable production growth to supply goods and services to the public and enterprises;
a price stability;
high employment rates;
a foreign economic balance translated into an active export – import balance and a convertible currency;
an improvement of a macro – economic situation, an economic advance and an overall upgrading of living standards.

To this end, three tasks will have to be solved by the public at large:

what is to be produced and the quantities thereof;
the raw materials and technology necessary for a production process;
who is recipient of the product (designed for)?

These are the questions linked with some, seemingly, insoluble problems. Speaking in terms of a historical perspective, three economic systems can clearly be singled out:

traditional primitive communal and feudal societies dealt with the three tasks set out above in terms of traditions and customs, religious canons, with economic guidelines hardly taken into account.
In case of a planned economic system, solving those tasks is up to the state. The system generates a powerful bureaucracy and can meet some of the popular requirements (an assignment of the produce, employment); an overall economic progress, meanwhile, is hindered significantly enough. The planned economic system calls for an overwhelming control and tough penalties.
Market economy is grounded upon the supply-demand curve and an unhampered competition. An economic progress can be achieved through a prompt and an effective satisfaction of popular requirements. The state is set out to minimize a social disparity through viable fiscal policy and a legal basis.

The Soviet – Era Economy and Georgia

A management system is the chief feature of the Soviet economy. The Soviet administrative management was far from homogeneous and could be divided into the following elements:

A regulator – the chief element of the administrative economy that relied upon a tough centralization, well calculated steps and planning. Red tape used to be common place among regulators, as well as poorly developed public relations and an inadaptability with a novelty. That kind of management works, if regulations are reasonable enough, i.e. if each employee carries out assignments and is accountable for them;
An administrator – implementing an authoritarian management, retaining a tough control over all the management links and taking individual decisions prompted by a personal experience. An Administrator cares but little about economic, moral or otherwise motives of labor. Within the context of this sort of management, achieving tactical goals and solving short – term problems is simple enough. The strategies, meanwhile, form a substantial obstacle in the areas, such as: a high - quality production and service, an introduction of scientific and technical accomplishments, a determination of long – term strategies of an enterprise and an efficient planning;
A colleague – minded - an adherent of a form of management targeted at collective decisions made at regular meetings of penals formed for this reason. As a result of this kind of management largely sensible decisions are made. The method, though, is far from flawless: no one is personally responsible and the head of an enterprise does not usually press forward with his views and assessments of problems, letting things go of their own accord. The decisions are given up frequently enough and the head of an enterprise is easily influenced by his superiors (bosses). "He is but a shepherd and not a manager" (V.I. Tereschenko "Conversations of an Economist" (30 years in America) – 1994, pp. 14 – 16).
A locomotive – this type of a manager cares a lot about meeting output challenges, with the staff given but little need. Self – confidence and a conceit are the two chief traits of his character, along with a concentration of authority and a demand of an unconditional obedience of the subordinates. Tasks take up nearly all his time and energy, he feels responsible and accountable for the final results, assessing himself as the sole factor of progress.

In the Soviet times, a production of an inadequately costly, rather low – quality industrial produce was warranted by an import of cheap fuel, raw materials and food products subsidized from the center. Owing to a practically monopolized supply of commodities like tea, tobacco, wine etc. to the Soviet agricultural market, Georgia used to get substantial profits, largely gained by "the shadow economy" and a private agricultural sector. Hence, the republic's image of a well - advanced region not merely in terms of the Soviet Union but in broader terms, as well.

Other favorable factors thereof were the country's mild climate, it’s convenient geographic position and some of the characteristic features peculiar to the Georgians – to make much of a foreigner, no matter whether just a friend or an official, to take painstaking efforts to please a visitor that more often than not used to be perceived as an unmistakable sign of welfare very striking indeed, given the extremely low living standards throughout the USSR.

The export – import peculiarities of the Soviet Georgia created favorable conditions for a development of the highly profitable industry and agriculture. Numerous coastal, mountainous and spa resorts, a variety of climatic and geographic zones, along with a popular optimistic mood held a promise, largely an illusory one, of a welfare state that the future, independent Georgia could possibly turn into.

A collapse of the Soviet Planned Economy and Georgia

During the Soviet Period, Georgia used to be described as "a small America” because of its living standards (the highest in the USSR) and a robust, well - integrated economy. But soon after the collapse of the Soviet Union, the Georgian economy and living standards slumped abruptly making the situation the worst among the former Soviet Republics. A description of Georgia's macro – economic policy calls for a consideration of quite a few micro – economic parameters, since an insight into an individual phenomenon is necessary to create and a true – to – life picture of an overall macro – economic situation. Micro – and macro – economic issues form an entirely being the interdependent links of a single chain. (Aslanishvili, D. (2016). Market foundation for sustainable economy growth and energy policy (Georgian case). Modern Economy, 7(03), 314-319.)

"Perestroika" had envisaged a modernization of the USSR, but subsequent developments brought about dashing changes into a political environment of the vast area, making the leadership apply new tactics. The latter's, however, came to nothing, largely because they involved but limited, reluctant efforts at a quasi – democratic transformation of the totalitarian empire and made it look even more outdated and obsolete.

The collapse of the Soviet Union created quite a different political, economic and a social situation and absolutely new industrial relations, as well as a new labor resource management system.

Personal capabilities and competence are of a supreme importance to market economy, playing a far greater part than one's age, nationality, political or any other background or a past experience that does not always make for progress. What really matters are professional skills, a good education, inquisitiveness and an adaptability.

The former Soviet republics inherited a centralized, planned economic system and structures that have turned out entirely useless.

It should also be said here that a sheer strive for an economic independence has allowed the post – Communist circles to retain power in the former Soviet Republics. A smooth evolution of a political base and its economic structure has turned out largely impossible, that resulting in an unpredictable and a negative outcome.

A political disintegration of Georgia was accompanied by a break – down of its economic system, caused mainly by falling apart of a single economic area of, a consumer market, communications and a through transportation. Moreover, the situation gave a green light not only to the sound political forces but the adventurers, too, who would not acknowledge the necessity of taking into account the realities of an integrated economy during the transition to market economy.

A political disintegration of the empire and a collapse of its planned economic system brought about a neglect of peculiarities of the transition to the market economy, that resulting in a break – down of a once well – functioning production – supply system.

The Transition Period and Its Chief Features.

The developments were about the same both in Georgia and the rest of the former Soviet republics. Moreover, the situation here took an even worse trend the reasons behind an economic break – down in the former Soviet republics had much in common: a collapse of trade relationships between ex - Soviet partners, increased fuel – prices, an entire disruption of production etc.

But, along with those, there were other factors peculiar to Georgia; armed conflicts, a civil war, strong separatist movements – these all making an extremely negative impact upon production and trade. Apart from a break of internal economic links, the foregoing developments brought about:

A halt of oil and gas import from Russia;
Civil war and conflicts in two regions;
Homelessness of thousands of highly traumatized people.

Now that fuel and industrial products, as well as basic food items could only be imported at international market or approximate prices, with local industrial and agricultural produce uncompetitive and, therefore, unexportable because of high transportation costs and the quality low enough not to meet international standards. The slump, meanwhile, gained momentum. The socio – political cataclysms resulted in a popular apathy, especially striking among the intellectuals. the military conflicts caused a blockage of some of the vital transportation routes, with an export of raw materials cut down and markets lost.

The Georgian economy, especially so, its industrial sector, got paralyzed, with the functioning enterprises being few in number and an output thereof reaching but 15% of their initial capacity. Moreover, their produce targeted at the Soviet Market, turned out hardly adaptable to the market economy environment.

The situation in the Energy sector became an especially unpromising one. Meeting the consumer demands of the 80's called for an 1,5 billion dollars' import of oil, natural gas, coal and electricity. During the collapse period it was impossible. The situation, meanwhile, made an even much smaller fuel supply virtually impossible, and that when an energy consumption in both industry and agriculture diminished radically (74% and 73% - in 1993 compared to the one in 1998). (Aslanishvili, D., & Omadze, K. (2013). The Impact of the Economic Crisis on the World Economy–TSU. In International Scientific-Practical Conference of the Institute of Economics (pp. 28-29).

A factory of Ferro – alloys in the town of Zestaphoni, as well as quite a few of the coal – mining and engineering factories were at a standstill.

Apart from the foregoing reasons, an inefficient management of enterprises in the market economy environment, contributed to the crisis.

An industrial planning, management and control in the Soviet era were carried out from Moscow, with the local economic authorities dealing with merely an administrative and a technical potential and caring but little about effective investments, tariffs, a financial autonomy, potential markets etc.

An unpromising economic situation was deteriorating steadily because of an inability of economic circles to assess and face the new realities. The reasons thereof were as follows:

An impact of an outdated ideology and attempts at an assessment of the new realities in its terms;
An application of the old methods, with the result being an aggravation of the situation;
And the foremost: Georgia, along with the other Post – Socialist countries is a transitional economy, with the reforms thereof being totally unprecedented.

It's obvious enough that without taking into account the western, as well as, the Eastern European experience and a thorough restructuring of management targeted at a complete autonomy of an allocation finances, a production and a sale, an economic stability is unattainable.

The new situation exposed an inaptitude of the ruling circles, whose experience of an administrative management (often an efficient one), fitted into the framework of a totalitarian state. That inaptitude was generated not so much by a lack of laboriousness, limited mental capabilities or a determination, but their political and economic ways of thinking formed of outdated concepts.

The world energy crisis of the 70's provided a striking example. The Soviet leadership of the time resorted to a mass supply of fuel resources to the consumer market, protecting thereby the economy from a negative impact of willfulness of the oil – producing countries. (Aslanishvili, D. (2016). Market Foundation for Sustainable Economy Growth and Energy Policy (Georgian Case). Modern Economy, volume 7, p. 314–319Modern Economy, 2016, 7, 314-319 Published Online March 2016 in SciRes.)

As against the Western market economy democracies, Georgia and the other former Soviet republics failed to make use of the experience as to how to come to terms with a fuel shortage, increased prices and to make an adequate economic reaction to not so tough, albeit lasting circumstances.

Among the main reasons behind the industrial, slump, the latter factor played not an insignificant part, as made evident by so many enterprises standing at a standstill.

The industrial crisis worsened because of high costs of a rehabilitation and a utilization of an inherited machinery. Looting of copper appliances added up to a complexity of the situation.

The Soviet era machinery is now obsolete both physically and morally for, as is well – known, the last years of the Communist regime stood out for their backwardness and a high – degree concentration upon the military – industrial complex.

A production of agricultural products traditional for Georgia also diminished significantly because of a shrink of a state – owned public sector arable land, on the one hand, and a sluggish pace of a land denationalization (privatization), on the other, another negative factor was an inaccessibility for agricultural laborers (peasantry) of traditional export markets shut off by the conflicts in Abkhazia and North Caucasus.

The peculiarities of the Soviet export – import system turned out unfit in the new circumstances. Along with that, Georgia found itself in an imposed economic blockage, accompanied with an inefficiency of the management structures: that led to a virtual disaster – 40% GNP reduction. (Aslanishvili, D., & Omadze, K. (2016). Origins and the Reasons of Monetary Crises in Georgia (1995-2016). Modern Economy, 7(11), 1232-1250)

Apart from that and a blockage of transportation routes and an overall atmosphere of impunity had paralyzed practically all the economic activities in Georgia. Such was the situation by 1993. The economic crisis had proved to be the largest – scale and the most severe amongst the former Soviet Republics: the 1995 production level formed but 30% of that of 1991 and a devaluation of the coupon – a surrogate national currency brought into circulation in 1993, hit record levels. It was for that reason that the wages were merely symbolic.

A consumed energy debt and, also, numerous incidents of an improper spending, along with an absence of labor encouragement leverages caused a build – up of Georgia's external debt up.

These were the factors behind a disastrous economic slump in Georgia.

The severe economic crisis, understandingly, reflected in GNP that between 1994 – 1995 formed an annual $300 per capita that serving as an indication of the country's joining a group of the world's poorest states. (The UN Development Program: "A steady Development of the World", 1995)

Thus, a break of trade links after the collapse of the USSR, a production cut, a fall of living standards etc. prompted the Organization of an Economic Collaboration and Development in Europe to recognize Georgia as a developing country.

All the foregoing reasons have made an implementation of reforms an immediate necessity.

The new Economic Relationships and Georgia

A transition to market economy and its steady development has to do with personal features and peculiarities. According to Adam Smith, a driving force behind an economic progress is a desire to satisfy individual economic interests. It should be kept in mind that such traits as: egoism, a desire to get maximum outcome from a minimal input and a rationalism are essential to humans. P.Heine's suggestion saying that an economic theory would lose its predictability unless there was rationalism and contingency and whims took a center stage – sounds reasonable enough. (Heyne, P "An Economic Way of Thinking", p.444).

The way the new economic relationships have been establishing in Georgia is rather curious.

In late 1994, the first indications of an economic stability appeared in Georgia. The fall of GNP slowed down – that forming an evidence that the first phase of the new economic relations had set in a severe energy crisis in Autumn and Winter of 1994 caused by a halt of fuel import and, a negative impact of Mafia clans invigorated during the armed conflicts and seeking for a maximum profit, practically stifled the slightest progress detectable by the time.

Georgia's meager resources of hard currency and precious metals had been nearly consumed, that compelling the country to resort to an external debt to make vital economic systems function. (Aslanishvili, D., & Omadze, K. Georgia› s external debt structure and the challenges of the current situation)

Georgia's unpromising economic stance has attracted plenty of the international financial organizations' attention. Social tensions have slackened owing to food and, partly, fuel shipments (chiefly from the West and Turkey) and made it possible for the government to avoid some grave complications. But for that aid, a sheer survival of the population in freezing winter temperatures of 1993 – 1995 would have been questionable. The results of the donor countries' activities have been made evident since late 1995, for a sizeable financial aid is a long – term affair. It should also be noted here that largely to an outside financial assistance and, also, giving up liberal fiscal policies that the Georgian National Bank had been pursuing the Georgian surrogate currency coupon boosted ($1 = 1300000 coupons since January 1995, instead of $1 = 2500000 coupons in Summer 1994).( Aslanishvili, D., & Omadze, K. (2016). Origins and the Reasons of Monetary Crises in Georgia (1995-2016). Modern Economy, 7(11), 1232-1250.)

A no or a minor – 3 – 6% deficit budget planning and an implementation play a significant part in an economic stabilization process. The challenge, however, could not possibly be met a little earlier because of excessive subsidies.

Putting up finances for unprofitable enterprises at the expense of small, fixed prices on some of the food products and fuel inherited from the Soviet era, made it impossible to pursue sound fiscal and monetary policies and invest into high – priority branches to warrant an achievement of a speedy economic and / or social effect, a zero – deficit budget, well-shaped – out tax and tariff systems, as well as a price liberalization on bread and fuel, along with other economic methods, a stronger coupon. The measures, however, brought about but little effect in 1994 – 1995, largely due to a virtual pauperism of majority of the population, non-operational enterprises, disruptions in fuel supply and a transport isolation.

Stringent fiscal and monetary policies, along with a price liberalization, enlarged a circulation of the coupon and paved way to a subsequent introduction of Georgia's genuine national currency. It should be said here that unfavorable circumstances of the time – an overwhelming crisis in all the fields, a virtual absence of state institutions, an embezzlement of hard currency and any other reserves, for that matter, a chaos and an atmosphere of impunity, left room for restructuring the ruling bodies and a selection of higher – skilled public servants – the necessary steps towards an economic recovery prompted by the international organizations. The undertakings were, moreover, financed by the international organizations themselves.

A stabilization of the Georgian economy, its further advance and a merger with an international market call for a political and an economic involvement of foreign partners. A rehabilitation of the country's production sector involves abundant financial influxes aid broader economic links.

The problems calling for an immediate solution are as follows:

a) Ranking the enterprises according to the high – priority fields;

b) An at least minimal fuel and a resource supply to the high – priority industrial and agricultural enterprises;

c) An accumulation of foreign credits and investments for a rehabilitation of those enterprises.

The next stage strategic task ought to be a rehabilitation of a local resource – oriented modern economy, for a High-Tec installation in various fields is to be targeted at a consumer demand and an export potential. The challenge calls for a formation of corresponding moral and scholarly grounds.

The latter task, meanwhile, is substantial enough, for it involves a time and labor consuming procedure of a consideration of alternative technological variants, so that both an international experience and local peculiarities are kept in mind.

Joint intellectual efforts of local and foreign experts hold promise of an eventual success.

References

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