According to data from the National Statistics Office of Georgia, in May the Gross Domestic Product (GDP) grew by zero percent on the corresponding indicator in April. In previous articles, I have warned about the high likelihood of recession. The Georgian government, however, forecasted economic growth of six percent. The International Monetary Fund downscaled that forecast to four percent, providing that the Georgian government meets certain preconditions. One such precondition concerns public procurements, which represent an integral component of GDP. To explain more concisely, these deal with the financing of infrastructure projects. The problem, however, is that the budget of the Ministry of Regional Development and Infrastructure does not even comprise two percent of GDP, which means that it is insufficient for achieving even a two-percent growth rate. The optimism of the Georgian government also rests on measures undertaken in the agriculture sector, on soft agricultural loans as well as on an ambiguous investment fund designed to finance agricultural projects. Currently, agriculture makes up nine percent of GDP (or 2.3 billion GEL). Thus, even making the assumption that those projects implemented in this sector this spring prove to be successful, the increase in agricultural production will be unlikely to exceed 460 million GEL, which does not provide much ground for optimism. A theoretical chance of meeting the forecasted growth lies in attracting domestic and foreign investments (of at least 1 billion USD) and in seeing an unexpected step-up in economic activity – however, judging by the current statistics, this would be tantamount to a miracle. Hence, the forecast of even a four percent rate of economic growth is unrealistic. In the best case scenario, the real GDP growth will not happen, but it must also be noted that the likelihood of recession is high. This is the reality. The government of Georgia must undertake adequate measures otherwise an economic crisis is inevitable – especially considering that the signs of crisis have already been seen in terms of budgetary revenues.
An economic crisis emerges when the economy stops growing and the government can no longer fulfill its liabilities, especially in the area of social policy. Such a crisis would cause a destabilization of the political situation, thereby increasing the probability of the dismissal of the government. To save its skin, the government would turn to the International Monetary Fund and other international financial institutions, seeking their assistance in securing foreign loans. In such a case, however, we would find ourselves in the situation of fulfilling unrealistic promises under the conditions of economic recession, hoping that future generations will be able to pay back the increased foreign debt at the detriment of their own welfare. In fact, the only way for the government to overcome a political crisis is accepting a deterioration of future living standards. If the government does not implement all necessary measures in a timely fashion, it will necessarily come to face such a choice.
The forecast of a four percent rate of economic growth is unrealistic. In the best case scenario, the real GDP growth will not happen, but it must also be noted that the likelihood of recession is high.
The less developed the economy of a country, the more acute the form of political crisis it would come to face. The global experience provides many such examples. Let's look at the developments in Greece. Against the backdrop of economic crisis, the Greek government was unable to fulfill its liabilities to society and was forced to plead to more developed EU countries, which were also experiencing the economic crisis, for assistance. In Greece, GDP per capita stands at 25,000 USD. By living standards, Georgia lags behind Greece by as much as six times. For economic welfare to increase to 25,000 USD in Georgia over the next 20 years, the Georgian economy needs to grow by at least 10 percent a year. It is thus easy to guess how high the likelihood of a political crisis in Georgia is – something which would undoubtedly further complicate the attraction of investment. We all make mistakes, but it is a pity that we fail to draw the correct conclusions from either our own mistakes or the mistakes of others.
The incumbent government of Georgia is not to be blamed for the economy not increasing today. In an earlier article, "Is a recession likely?" (published in Tabula English Issue # 27), I explained the main reasons for decreased economic growth in recent times. At this stage, we do not have the resources to create new technologies, but want to receive as much foreign investments as possible. We try to show the world that we have a favorable investment climate and can offer cheap resources. However, the truth is that today up to 200 countries across the world have low living standards and cheap resources, and each of these countries tries to attract investments. Investors thus have a wide range of choice and competition in this area is high. Investors cannot be lured by a favorable investment climate alone; nor are cheap resources a sufficient condition for them. They also need an impressive market of goods and services and relatively richer neighbors. The global economic crisis has resulted in a situation where businesses try to maintain what they already have rather than create something new, and hence the number of potential investors has plummeted.
The incumbent government does, however, facilitate recession. I explained this in my article, "Georgia's Investment Environment Will Further Deteriorate" (Tabula English Issue # 31), and identified the main factors that further decrease investments and lead to the zero-rate growth of the economy. These factors are: the process of reinstating justice, the adopted amendments to the Labor Code, the talk about a law setting a minimum wage, and xenophobic manifestations among government circles and society. This is happening because of ignorance rather than irresponsibility.
In this article, however, I want to draw readers' attention to the issue of why the Georgian government is acting irresponsibly today.
1. Forecasting six percent economic growth. Before submitting its budget, the government draws up a document outlining the main indicators and directions of the country. This document is the country's key development plan, it contains information about medium-term macroeconomic and fiscal forecasts. According to paragraph 2 of Article 34 of the law of Georgia on the State Budget, this document outlining the country's main indicators and directions is drawn up by the Ministry of Finance in coordination with the National Bank of Georgia; state representatives to administrative-territorial entities, i.e. governors; authorities of autonomous republics; local self-government bodies; and the spending organizations identified by the government of Georgia. To this end, each of these entities and corresponding senior officials are obliged to supply the Ministry of Finance with the requested information. Consequently, the Finance Ministry, the Ministry of Economy and Sustainable Development, and the National Bank of Georgia have all the necessary information to predict macroeconomic parameters.
By 1 January 2013, official statistics had already shown signs that the economy was preparing to enter a new reality (the overall supply had decreased). However, the heads of the Finance Ministry and the Ministry of Economy and Sustainable Development made populist statements and forecasted six-percent economic growth. Later, the president of the National Bank admitted that that forecast was unrealistic and, in so doing, came under sharp criticism from the prime minister and the government's economic team. After the international financial institutions published the results of their studies, the government admitted that economic growth had slowed, and it downgraded the forecast from six to four and a half percent. It must be noted, however, that this reduced growth target is still unattainable.
It is well known that macroeconomic indicators play a big role in the planning of the state budget. Based on these very indicators, the Finance Ministry, via an electronic system of budget management, supplies spending organizations with budget application forms. Using these forms, the spending organizations electronically provide the Finance Ministry with information about their budgets for the following years. In fact, the Government of Georgia is misleading the population when it plans a non-deficit budget (calculated on a 4.5 percent increase). In reality, under the conditions of unrealistic economic growth, the risk of a budget deficit is very high. As a rule, this transpires in the last quarter of the calendar year (depending on the size of the deficit). Thus, not only does the Georgian government mislead the population, but, at the same time, it deliberately takes such steps that facilitate the creation of an economic crisis. This is precisely a form of irresponsible behavior from the government.
2. Fulfilling increased social liabilities promised to voters. It is a welcome move when a political party, having come to power, tries to deliver on its pre-election promises. However, one should match promises with possibilities. The social sphere is a painful issue for any country and a beloved topic of politicians because it is very easy to win the hearts of economically disadvantaged people by promising the likes of free school textbooks and medical care, soup kitchens, programs for combating poverty, and refined employment policies. Especially popular are those promises of free education, universal health care, pension systems and subsidies in agriculture.
In the area of health care, the Georgian government is establishing a system the likes of which even the economies of highly-developed countries would be unable to finance. For example, the GDP per capita in the United States comprises 47,000 USD. The Achilles' heel of President Obama's administration is a model of health care which imposes huge liabilities on the state and necessitates the US government taking on additional foreign debt. Even making the absurd assumption that public servants are able to administer a most difficult system in a more rational and efficient way than the private sector, it is impossible to finance such a huge amount of liabilities from the state budget. This implies the delivery of a wide range of medical services to citizens – ranging from preventive checkups to planned surgeries – all for free. Health care is an expensive service. It is a luxury item. Sometimes, these services even cost more than the purchase of property.
Every person tries to distribute his/her income rationally. The wishes, needs and requirements of people are infinite. The only thing that is finite are those demands that are affordable and limited by an individual's income. People thus satisfy their requirements in accordance with the size of their incomes. A person attempting to satisfy higher requirements than his/her income can afford and, at the same time, seeking no source to cover those higher costs, would be called irresponsible. The same holds true for the government – the institution elected by the people to ensure social revenues, on the one hand, and to meet social requirements, on the other. An ambiguous health care system, doubling the amount of higher education grants, doubled pensions, free school textbooks, and an unprecedented amount of subsidies for agriculture – all create sufficient conditions for a budget deficit to emerge. This is especially likely in the backdrop of slackened economic growth, which is expected to further slowdown rather than improve. A person who spends more than his/her income often has to pay back debts throughout his/her life. Such a person is said to be in a deep economic crisis. With the government conscientiously encouraging a budget deficit, it is society that has to pay off these foreign debts, and these will also be passed on to future generations. In such a case, an economic crisis would be said to have emerged in the country. This is exactly how the irresponsible behavior of the government is expressed.
The point is that irresponsibility is not specific to the current government. Irresponsibility has been a characteristic of every Georgian government. Governments of many developed countries also act irresponsibly. It is the rules and the system of state arrangement that makes governments form as such. This is one of the flaws of democracy. When the overall supply decreases, politicians react to that by increasing overall demand because they cannot really influence overall supply; this leads to a point where the existing crisis reveals itself in a more acute form because the deficit is financed by foreign debt or/and the emission of money. When a sick person is treated with pain-killers alone, he/she feels relief for a certain period of time, but the illness will eventually become worse. That is how the irresponsible government acts, because no one will hold it responsible for the problems that will emerge in future. The disease needs to be treated. The treatment implied is reduced overall supply, which will increase only if business becomes more active. This is possible only if the government cuts tax rates, minimizes liabilities, abolishes subsidies, rejects the regulation of business and cuts the costs of state administration. Aside from the tax cuts, all these other reductions would be very unpopular steps for society.
owever, society has no other alternative for achieving high economic growth. In highly developed countries this problem is less painful because their societies managed to accumulate wealth over the past decades and their governments somehow manage to redistribute revenues. Georgia lags far behind those countries by living standards. The government will not be able to provide free education or free health care because this requires a totally different scale of income. Any attempt to provide such things will end in fiasco and even the small amount of reserves, which in one way or another are still available, will disappear. The only solution is economic growth; and this can only be achieved by taking the aforementioned unpopular steps. Combining and balancing the two options – avoiding taking these steps whist attempting to meet increased social liabilities – means that society will neither increase its income nor receive free social services.