Summary

In the article is described the macroeconomic instability in the transition period’s Georgia, specified it’s reasons and elucidated the problem of liberalization, inflation and prices.

During the transition phase any country’s peculiarity is its global instability. This determines the macroeconomic problem which should be solved during transition period – that is structural, investment, or technical-technological bases. Urgent solving of this particular issue determines the objectives at the macro levels of economic transformation that faces the country and its institutions. Macroeconomic instability, which has many different forms, has emerged as a result of combination of past and present reforms, of their objective and subjective influences. The preliminary conditions of countries under transition can significantly vary. The difference can be in the degree of macroeconomic instability. The instability can be revealed in budget and foreign trade deficit, foreign debt, limited currency reserves; considerable loses in banking system and state enterprises.

Results point to the importance of domestic investment and macroeconomic stability – as reflected by low levels of inflation and balanced budget – as key driven of growth.  In a long term growth framework, deficits are detrimental to growth since they are associated to corruption, rent seeking, an excessive size of government and distortions in the resource allocation. A low rate of inflation suggests an effective degree of market liberalization. Furthermore, in a heavily competitive environment characterized by strong rivalry because of the arrival of foreign firms, price stability is key.

Domestic investment also seems to have been an important driver of growth. Evidence concerning FDI is puzzling, however. The correlation with GDP growth is negative, whereas the sign is positive when GDP in levels is taken as the dependent variable. This is, no doubt, something that needs to be assessed more carefully. Our analysis suggests that, although this group of countries has followed a particular process, with specific features, the key factors explaining growth for other samples of countries are also relevant in this case.The structural adaptation is concerned with the issues of long–term economic growth, namely disorder in production economy, control of prices, interest rates and exchange rate, tough customs tariffs and quotas, introduction of taxes and subsidies. The coincidence of the implementation of abovementioned activities is crucially important for transition economy. Short-term stabilization policy should be supplemented with the structural reforms in the spheres of budgeting and finances, monetary –fiscal and foreign economic affairs, as well as systemic reforms in ownership relations, enterprises, prices and labor market. Long term perspectives of stabilization can be provided only in case of indirect mechanisms of macroeconomic control.