Annotation. After the global financial crisis of 2007-2009, the framework of the international financial system was actively restructured, with the roles and places of developing countries changing.  The article analyzes the current stage of global financialization and identifies recommendations for Georgia based on the country's unique features. The author notes the importance of new mechanisms that are increasingly moving to the use of complex financial technologies, primarily digital ones. Today, state participation in financialization is not limited to the traditional functions of regulation, monetary and tax policy, setting their conditions and coordinates. The article notes a significant expansion of forms and methods of interference in the functioning of markets by the state, which is already acting as an institutional investor, issuer, and platform for the implementation of financial services.

The differences in the approach of Nobel laureates in the analysis of these processes are shown (J.Stiglitz, B.Bernanke, A.Sen), as well as important changes in the world's financial system that Georgia needs to take into account – alternative digital settlement systems in interstate associations, gold shares in state reserves, de-dollarization, climate finance, crypto markets, and others.

Keywords: financialization,Great Recession,quantitative easing, “war” of state subsidies, mining. 

Introduction

One of the key trends of global economic development in the new geopolitical reality is financialization, i.e., the rapid development of the financial system in comparison with other sectors[1].

Financialization represents the largest change in the structure of the economy in the last half-century. In doing so, we are dealing with a process that permeates the whole of society – from health, education, and housing policies to food production and the response to the climate crisis – and the outcome of this process is uncertain and open to history. In essence, we are talking about the exceptional dominance of the largest countries and firms as a result of their ability to serve and play the financial markets.

The main drivers of financialization are the IMF and the World Bank. In 2024, these organizations recorded that the global financial system is on track to improve stability, but faces a number of transition challenges due to regional vulnerabilities and political regimes.

The 2007-2008 crisis and the Great Recession have sparked a new discourse on the architecture of the global financial system[2]. These developments have drawn attention to integration, governance inadequacies, and the emerging systemic risks of financial globalization.

The sanctions imposed by the United States and the European Union against Russia have also significantly changed the global financial system.

Today, policymakers in emerging market countries face the challenge of moving towards independent monetary policies, sovereignizing the economy, and more stable and balanced financial sectors while stimulating market growth. 

* * *

Theme of finance is constantly at the center of research for Nobel laureates, and especially after the global crisis. Thus, Joseph Eugene Stiglitz, a follower of the British economist John Keynes, a proponent of the active role of the state in the economy, a former chief economist of the World Bank and a former chairman of the Council of Economic Advisers of the United States, believes that the period of unchallenged economic hegemony of America lasted only 19years, from the fall of the Berlin Wallin 1989 to the collapse of Lehman Brothers in September2008. The rapid actions of governments, forced by the magnitude of the crisis to abandon the "laissez-faire" approach  to economic management, prevented the great recession from turning into a second great depression. However, he noted a growing consensus that something is wrong with a system that can impose high costs on a large number of people who are hardly even participants in international financial markets without speculating on international investments and borrowing in foreign currencies. Although crises can be overcome with emergency funding, such assistance places a heavy burden on taxpayers living in the affected countries, and high costs are detrimental to living standards.

Ben Bernanke, who won the award in 2022 together with Douglas Diamond and Philip Dubwig, played a big role in establishing the mechanism of "quantitative easing"[3], that led to the grandiose operation of "flooding" money during the crisis and later during the coronavirus epidemic. "There is no alternative to large-scale paper purchases: using the printing press is better than stagnation", Fed Chairman Ben Bernanke argued at the time. In general, banks were allowed to give out incredible amounts of money, mitigating the problems of today as mitigating the problems of today as a pledge of tomorrow.

At the same time, the Nobel Prize winner Amartya Sen showed exactly what made the market ignore the obvious signs of an impending crisis and continue risky lending, borrowing and securitization. Its investigation was commissioned by French President Nicolas Sarkozy, who expressed dissatisfaction with the existing tools for assessing the economy and created a commission to measure economic health and progress. According to the conclusions of A.Sen, the world has been following the financial growth of GDP with unhealthy interest in recent years. Preoccupation with this single indicator made us overlook other equally important social indicators.

The appearance of any unfavorable data on the economy instantly generates talk of another cycle of "money printing" and raises stock indices to new heights. The hype around QE is skillfully fueled by the global financial media and analysts of leading banks and investment funds directly interested in continuing the "banquet".

However, the implementation of these programs is always associated with risks, and today economists tend to believe that the current situation in the US and EU economies by 2024 is precisely the result of unjustified use of QE programs. Extremely excessive amounts of funds were poured into the economy, which could not but lead to an explosive increase in inflation and inflate giant bubbles in the stock markets.

The next important factor was the process of moving away from the US dollar as a universal instrument for international payments. Already this year, several landmark proposals were announced, each of which individually is not able to seriously shake the position of the dollar as the main currency of the world, but collectively continues to rock the existing world order. 

The dollar's dominance is attributed to the size and stability of the US economy, as well as a favorable legal system for investment. Experts from the Brookings Institution, one of the leading American think tanks, have identified a factors that threatensе the dollar's dominance in the global economy. The role of the US currency is gradually decreasing, the question is whether this process is inevitable or not. The analytical center points out that the use of the US dollar in the global financial market has been declining for several decades. Although the dollar still holds a large share of central bank reserves and dominates global trade, the International Monetary Fund (IMF) estimates that the US currency accounted for 59% of global reserves as of early 2024, up from 71% in 1999. At the same time, the share of non-traditional reserve currencies is growing. By early 2024, the Australian dollar, Swiss franc and Chinese yuan combined accounted for 11% of central bank reserves, compared to just 2% in 1999. The trend may continue.[4] The national debt of the United States recently reached a new record level — the debt on government bonds exceeded $35 trillion.  Bloomberg believes that it was the US sanctions against Russia and the blocking of Russian gold and foreign currency assets that pushed other countries to reduce their dependence on the dollar.[5]

Over the past few years, China has been systematically getting rid of US bonds, and actively buying gold with the funds received from their sale. Most of the precious metal comes from Russia, one of the world's largest gold producers.  After the crisis, starting in 2010, according to the IMF and the World Gold Council (WGC), the world's central banks went from being net sellers of the precious metal to net buyers. This volume of gold purchases by central banks was recorded 55 years ago – in 1967, when the gold-dollar standard was in effect in the world. As a result of the banа on the import of Russian gold by Western countries in order to deprive the country of a significant part of its income, supplies were redirected to the states of the Global South, seeking to reduce dependence on the US dollar. In 2024, the exchange-traded price of gold for the first time in history exceeded the mark of $2600 per ounce, the gold rush continues: in mid-August, even ETFs for the precious metal, which had an outflow of funds in the spring, were not left out.

In the race for leadership in the so-called "strategic" sectors, a sharp increase in the role of the state and large-scale subsidies in the form of tax incentives, grants and loan guarantees to support production[6]have become of great financial importance. In response to China's state subsidies, the US Inflation Reduction Act (IRA) and the Chip and Science Act have introduced attractive conditions for local production of clean energy products and semiconductor equipment. IRA spending alone, originally estimated at $385 billion, is projected to reach $1.2 trillion, effectively destroying global market competition. The European Union reacted to such a "subsidy war". His protests focused on provisions that strengthen domestic production in the United States to the detriment of other countries. European Commission President Ursula von der Leyen has called for the creation of an EU Sovereign Wealth Fund (ESF) to deal directly with the consequences.

There is still some intrigue until the November US election regarding the effective response of the global financial architecture to the current challenges of the climate agenda. On many platforms (UN[7],BRICS, ...) they discuss the issues of its reform. It was created in the middle of the 20th century and at the time of its inception already had structural shortcomings, but today it is going through a global stress trust and cannot withstand it. The current architecture has failed to ensure that stable and long-term financing is mobilized at the right scale for the investment needed to fight the climate crisis and achieve sustainable development. For projects that prevent emissions from anthropogenic and natural factors, or improve the absorption of carbon dioxide by landscapes, the so-called Nature-Based Solutions (NBS), require a single global open voluntary carbon market and a register of carbon units.

Finally, one of the key points in the modern financial system of the world is the use of cryptocurrencies. The campaign headquarters of Donald Trump actively develops this topic, and the former US president himself at a meeting with voters directly calls for voting for him "if they like cryptocurrency in any of its manifestations."

Trump said that "the future of cryptocurrencies and bitcoin is being created in the United States." At the Bitcoin2024 cryptocurrency conference in Nashville, he proposed creating a "strategic reserve of bitcoin." The politician stressed the importance of cryptocurrencies for the country's economic competitiveness and promised never to sell bitcoins confiscated by the state. "These coins will be included in the national reserve," Trump promised: "The creation of a strategic reserve of bitcoins will firmly consolidate the dollar's position as the world's reserve currency and ensure that we remain the world leader in financial innovation»."

In November, the United States will choose between two financial programs. First, the Republicans’ proposals to expand consumer and corporate tax breaks, introduce universal (and higher for China) tariffs, deport millions of migrants who entered the United States illegally, and give the president more authority over the Fed's actions (lower the dollar rate). The plan includes assistance to home buyers, as well as the abolition of taxes and benefits in the amount of $7,500 from purchases of electric vehicles. It is difficult to interpret this as anything other than an inflationary boom and an explosive increase in the budget deficit.

On the other hand, the Democrats’ bill includes raising the corporate income tax rate to 28%, granting amnesty to millions who entered the United States illegally or were deported from the country, and promising that the president will not interfere in the activities of the Fed, although this does not exclude the appointment of managers who support MMT (MMT — Modern Monetary Theory, also known as Magic Money Tree — the idea that the state can endlessly and with impunity print dollars and thereby cause only good). The program also includes the construction of 3 million new homes with a $25,000 subsidy for first-time home buyers. Finally, there will be a federal ban on inflating food prices against the backdrop of high inflation: paradoxically, this principle was one of the pillars of the Soviet economy and the main cause of the commodity shortage. "I will work to pass the first-ever federal ban on inflating food prices. My plan will include new penalties for opportunistic companies that take advantage of crises and break the rules, and we will support small food businesses that try to play by the rules", К.Harris said, an argument that "resonates widely with voters". In this case, there will be lower inflation with more state-controlled economic growth, and in fact, the risks of "fiscal blow-out" and stagflationary downturn.

Today, there is a de facto situation where priorities are given to political goals.  It is up to the political elite to decide how they assess the reaction of the electorate. And just a policy, especially in difficult situations, even during an economic crisis, often dictates the choice of measures taken – which as a result will determine large-scale changes in the global trade and financial architecture. 

Conclusions

Against the background of such a general picture, it can be assumed that the digitalization of finance and digital currencies of the Central banks (CBDC) how the key technological trends of our time will enable China to become the new "financial pole" in the world.

At the same time, Georgia needs to take into account the above-mentioned important changes in the world's financial system –

• the need for professional usage of all components of financialization,
• risks and prospects of de-dollarization,
• growth in the share of gold in state reserves,
• the emergence of alternative payment systems in interstate associations,
• competition of countries in subsidies for strategic industries,
• features of climat financing,
• development of the cryptomarket.

In connection with the issue of cryptocurrencies, Georgia is particularly interested in the example of the meeting of ARK Invest CEO Kathy Wood with Nayib Bukele, the current president of El Salvador, who actively supports bitcoin. K.Wood believes that the net gross domestic product (GDP) of El Salvador can increase tenfold until 2029, if Bukele continues to adhere to his plans to turn El Salvador into an oasis for the bitcoin and AI communities — two of the biggest economic and technological revolutions in history. Currently the country's GDP is $30 billion, and the average income is only $450 per month.  The government of the Latin American state is going to introduce the ARK Educate curriculum into the national education system, and El Salvador schools will have subjects in robotics, AI, blockchain, energy storage and multiomics. During the years of El Salvador's rule, N.Bukele recognized bitcoin as legal tender, abolished taxes related to technological innovations, and also abolished the tax on foreign investment and money transfers.

December 14, 2021 The National Bank of Georgia has signed a Multilateral Memorandum of Understanding of the International Organization of Securities Commissions (IOSCO) and has become an Ordinary member of IOSCO. This is expected to increase investor confidence and interest in the Georgian securities market, strengthen the reputation of the National Bank of Georgia as a securities market regulator, expand opportunities for integration with international markets, while enabling the NBG to provide effective capital market supervision through cooperation with regulatory authorities of other states and exchange relevant information.

Georgia has a reputation as a crypto-friendly country and is not going to stop at this stage[8]. The country's legislation has been adapted to achieve maximum harmonization with three important EU directives:

1. About payment services (PSD 2),
2. About Capital Requirements (CRD) and the Virtual Asset service,
3. About Suppliers (VASP).

The advantages of Georgia as a country for cryptocurrency mining are obvious:

• ability to optimize taxation;
• no state ban on cryptocurrency mining;
• availability of infrastructure for digital currency exchange;
• high-speed internet.

All this attracts a large number of investors to the country who want to open a company in Georgia and start mining bitcoin or other cryptocurrencies. Crypto enterprises located in specially created free economic zones do not pay taxes (except for personal income tax), and electricity is supplied at preferential prices (exempt from value-added tax). In addition to enterprises located in free industrial zones, individuals and legal entities are also engaged in cryptocurrency mining. In this respect, Svaneti is the most attractive, as electricity has been supplied to the population almost free of charge for almost three decades. This is what led to a fourfold increase in its consumption in the region over these years[9].

As for financial transactions, according to preliminary data, the volume of foreign direct investment in Georgia in the 2^nd quarter of 2024 amounted to $574.3 million, which is 10.3 percent higher than the adjusted data for the 2^nd quarter of 2023. By the end of the year, investments were made in the financial and insurance sector and amounted to $300.1 million, or 52.3 percent of the total volume of foreign direct investment. The second place is occupied by the trade sector – $79.2 million (13.8 percent), and the third place is occupied by the manufacturing industry with $55.5 million (9.7 percent), according to «Sakstat»[10].

Today, the country's potential is measured by duty-free access to a market of more than 2 billion human. Georgia itself has the most liberal conditions for creating and doing business in the region, as well as using all the components of financialization (banking, asset management, insurance and venture capital) at the level of government, society and business. 

References 

1 Epstein, G. Financialization and the World Economy. Edward Elgar Publishing. 2005. 440 Р. Available at: https://www. peri. umass.edu/ fileadmin/pdf/programs/ globalization/financialization/chapter1.pdf

2 Van Graver, D. The “new era” of digital authoritarianism.- International Journal of Communication 2018, no. 12, 3788–3794 1932–8036/20180005. Available at http://ijoc.org.

3 Lane P. R. and Milesi­Ferretti G. M. International Financial Integration in the Aftermath of the Global Financial Crisis. IMF Working Paper, 2017, 17/115. May 10.

4 Pan, F., Zhang, F., Wu, F. State-led Financialization in China: Case of the Governmant-guided Investment Fund, - The China Quarterly, 2021, No. 247. Pp.749–772. DOI:10.1017/S0305741020000880

5 Joseph E.Stiglitz. Columbia Business School. https://business.columbia.edu/stiglitz/about 

6 International Monetary Fund. World Economic Outlook UPDATE (WEO). The Global Economy in a Sticky Spot/ July 2024 https://www.IMF.org/en/Publications/WEO/Issues /2024/07/16/world-economic-outlook-update-july-2024

7 Global Economy Remains Resilient Despite Uneven Growth, Challenges Ahead. 2024 https://www.IMF .org/en/Blogs/Articles/2024/04/16 

8 World Bank. 2024. Finance and Prosperity. Washington, DC: World Bank. http://hdl.handle.net/10986/42075 License: CC BY 3.0 IGO