Economic Achievements

The Government’s Economic Achievements

Akaki Tsomaia
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One Year On from the 2012 Parliamentary Elections

One year, a single accounting period, is the minimal period of time on the basis of which one may speak about preliminary forecasts and the economic trends that will be observed throughout a parliamentary election cycle; provided, of course, that the state's behavior in regards to economic policy remains unchanged throughout that period. An analysis of the economic achievements of the past year helps us determine what social and economic problems and challenges the country will come to face four years from now. Making long-term forecasts is a very difficult and risky endeavor because no one knows how the events will unfold in reality. In order to make an accurate forecast, one should take into account all of those variables which contribute to the formation of concrete economic results. Under the conditions of incomplete information and other rational restrictions, it is highly unlikely to be able to reveal all possible effective factors and to determine the future relationships and correlation between them. Consequently, our reasoning is based on the following assumptions:

  • The review of basic variables determining the stable functioning of the economy is based on historical information, in particular, the developments of the past two years.
  • The future structure and content of the main variables will continue along in the same direction that they moved during the past year – so long as the state's treatment of economic policy remains unchanged and also the internal (for example, the government's intellectual potential) and external (for example, the outbreak of war or Georgia gaining EU membership) factors influencing the variables do not dramatically change or affect, either positively or negatively, the direction, structure or content of the main variables.
  • In cases where the economic indicators have deteriorated, their further deterioration is expected in the future, because when elements of a system do not function smoothly the system breaks down more rapidly.

The above assumptions seem logical because it is unlikely that a victorious political force would abruptly change its declared fundamental economic orientations, namely: an economy based on private property with corrections for market "failures" (a regulated market economy), on the one hand, and on social justice (the elimination of inequality, universal health care, free education, et cetera), on the other. Thus, it can be assumed that any new state initiative, amendment (for example, to the Tax Code), decree or law, will be designed to strengthen the basic views. One can also hardly imagine hundreds of Steve Jobs-like characters, capable of working miracles on the international market, unexpectedly emerging in Georgia within the next three years. I think that most people would agree that these factors will most probably not change in the future. Therefore, one can boldly state that the economic results achieved during the past year are an integral element of the overall results that will be achieved throughout the parliamentary election cycle. These overall results will further deteriorate if the results of the first year are negative.

A simple way of measuring economic achievements is to compare ongoing statistical data on basic variables with the corresponding indicators of previous years. However, it should be noted that some results may have been obtained not because of ongoing state performance, but because of political decisions taken in previous years. It is therefore important to establish the correlation between a result, the cause of this result and the time when the action in question was implemented. Some results are the outcome of a series of political decisions taken by both the former and current governments. Consequently, in order to evaluate the economic achievements that the current government made within a year of being elected, we must exclude those positive and negative achievements that may be linked to the former government.
Let's first briefly analyze the ongoing situation. The past year saw a decrease in overall demand on the market, which was mainly expressed in plummeting consumer expenditures on goods and services. The situation is critical in terms of investments, not only foreign investments, but also bank loans and the population's savings, which have shown a downward trend. This reasoning is also supported by the indicator of inflation, with one being able to observe deflation, i.e. an overall decrease in prices. Shrinking retail sales have adversely affected the business sector and the number and the value of business transactions on the market have shrunk. To cut a long story short, the overall economic result has deteriorated. This is a fact also proven by international organizations.

A comparison of the promises and basic indicators of the pre-election program of the coalition that won the parliamentary elections with the actual indicators one year on, will help us better highlight the economic results.

The Georgian Dream's pre-election program emphasized that the development of small and medium size businesses would pull the country out of crisis, decrease unemployment, reduce the poverty level, improve the social environment, and lead to the emergence of a strong middle class. One year after this program was enacted, however, the number of small and medium size businesses have reduced, the economy is in a deeper crisis, unemployment has increased, the social environment has deteriorated, whereas discussions about the formation of a middle class now only causes ironic smiles.

According to the Georgian Dream's pre-election manifesto, the market would be cleared of artificial monopolies that impede free entrepreneurship and absorb a significant part of household income because of the unrealistically high prices set on essential goods and services. In general, essential goods are those for daily consumption that are cheap, uniform and less differentiated. For example, dairy products, bakery products, detergents, et cetera. However, one can see numerous firms represented on the market for these products and so monopolies basically do not exist there. Certain market segments, such as the retail and wholesale supply of oil products and pharmaceuticals, are separate matters, in which the number of firms on the market is relatively small and one can observe so-called oligopolies, not monopolies, operating. However, prices on those market segments have not changed under the current government – thereby debunking their pre-election rhetoric about there being political interests within the former government behind those businesses. Consequently, there are no artificial monopolies in Georgia. The same holds true in the case of natural monopolies (electricity, natural gas), where the small change seen in tariffs is merely of a symbolic nature and cannot have any positive impact on household incomes.

The pre-election program stated that the state must create a favorable environment to attract both domestic and foreign investments; savings, as well as reinvestment, must increase; instead of a consumption-oriented economy, the government policy will be directed towards an economy oriented on the increase of savings and capitalization, which will be decisive for long-term sustainable development. In legislative terms, nothing has changed in this sphere. The existing legislation is so liberal that one could not create a better legal environment. However, during the past year, the investment environment has drastically deteriorated, with not only direct foreign investments shrinking, but both private and social savings too.

According to the pre-election program, a basic benefit basket, as identified and financed by the state, will include those services totally covered under health insurance policies: outpatient services (personal doctors and specialists); preventive examinations (screening) and immunization (vaccination) for the population; first aid health services; hospitalization (including cardiovascular stenting and bypass); pregnancy and birth care; diagnosing and the treatment of infertility; the treatment of oncological diseases (including radiation therapy, chemotherapy); urgent dental care; and the provision of essential medicine at 50 percent discounts. However, the health care service has sharply deteriorated during the past year. Many insurance companies have been left in an ambiguous condition because the state intends to provide the majority of services that their activities generally represent. At this stage, the state is unable to provide the above listed services (and will be unable to provide them in the future either). The health care business is developing with difficulty and at a very slow pace in Georgia. The reason for that is the very low demand on health care due to the low income level of the general population. The low quality of the Georgian health care services cannot be blamed on insurance companies alone, but also on such things as the low development of clinics and the poor qualifications of doctors and medical personnel in general. However, everything that has been created thus far as a result of the free market is now facing the threat of demise because the state intends to offer society something "for free" that private companies charge for. As a result, the quality of health services has further deteriorated.

The pre-election program promised that the government will free investors from state influence and create strong guarantees for the protection of private property. One year later, the investment environment has deteriorated.

According to the pre-election program, the government will stimulate economic growth oriented on diversified exports and increase the competitiveness of export enterprises, thus improving the trade balance. Over the past year, however, the export-import structure has not changed; nor has the trade balance improved.

The above cited excerpts are just some of those contained in the pre-election program of the Georgian Dream coalition for the 2012 parliamentary elections. Many more such excerpts could have been cited, but in choosing the examples provided above we tried to place emphasis on those variables that could illustrate tangible material economic achievements (the negative results of the amended Labor Code, for instance, are almost impossible to measure). Clearly then, the economic achievements of the year, across many variables, show the government drifting further away from its pre-election promises. Considering the assumptions outlined above, the economic picture three years from now will be even more critical.

There are three possible reasons for all of this:

  1. The economic orientations of the government are correct, but the strategy and policies chosen are wrong, thereby causing a drift from those orientations.
  2. The economic orientations and strategy of the government are correct, but the former government made so many grave mistakes that the correct attitude of the current government has, as yet, failed to overcome those negative results.
  3. The economic orientations of the government are wrong.

Let's discuss each of the above scenarios in turn to establish which of the three is the most plausible:

The economic orientations of the government are correct, but the chosen strategy and policies are wrong, thereby causing a drift from those orientations: establishing logical links between aims, targets, objectives and activities, belongs to the area of strategic planning – and our aim is not to evaluate strategic plans. However, it can be very easily determined to what extent the activities performed by the government comply with its economic orientations. In particular:

  • The Labor Code, anti-monopoly legislation and the establishment of an antimonopoly service, the focus on food security, et cetera, all do comply with the orientation towards a regulated market economy.
  • Universal health care, free education, free textbooks, the notion of an untaxed minimum income, and the like, all indicate a fight against the inequality of incomes.

Thus, the steps taken by the government are in line with the economic orientations declared under its pre-election program.

The economic orientations and strategy of the government are correct, but the former government made so many grave mistakes that the correct attitude of the current government has, as yet, failed to overcome the negative results: naturally, the former government made mistakes. The situation with the inviolability of private property was problematic; the Tax Code was very rigid and, actually, the fines and penalties imposed proved a very heavy burden for the business sector; tax disputes were almost never settled in favor of businesses, et cetera. Despite all these issues, the economic growth rate was still high and budget revenues showed a stable increase under the former government. Intensive talks about the above mentioned problems were ongoing during the past seven years, but regardless of these issues, a steady growth rate in investments was apparent (save for in 2008 when the Russia-Georgia war broke out). Among those investments worth noting are direct foreign investments, the share of which was especially high. Private savings also showed stable growth. The consumer expenditure structure saw an increase in purchase indicators for products such as household appliances, residential housing, cars, et cetera. It is thus not very convincing to assume that such issues as the infringement of private property and human rights affected the 2013 indicators of economic development, especially considering that the current government assures us that such problems no longer exist today; and yet, the investment picture has worsened instead of improving. The logic behind the argument that the new government failed to overcome the negative legacy of the former government might have been justified had the economy started to only gradually backslide, however, the instant decrease of GDP in December 2012 indicated that a large army of investors was no longer going to invest in Georgia's economy.

In reality, the scarcity of investments is caused by the fact that we are switching from a declared free market principle to a regulated market principle, which is further compounded by elements of social equalization. Regulations that are oriented on the development of a free market in fact restrict the free market, whilst the notion of greater social justice opposes efficiency (for example, the special emphasis on the rights of employees conflicts with the employment of qualified people). The important thing in economic terms is not whether a state is more or less democratic, but how high the degree of economic freedom is therein. The extent to which the government and society at large trusts the power of "the invisible hand" determines the distribution of limited resources inside a society. We all want to have free health care and education, but this will always be of poor quality whilst there is no adequate demand (and not only the requirement) for such products. Such initiatives only become possible when the living standards of the majority of citizens reach that level whereby other, poorer citizens can enjoy a limited amount of services for free. However, from the very moment when a person starts enjoying free services at the cost of others, the power of the invisible hand weakens and we come to face the problem of the efficient distribution of resources, which opposes economic development and the improvement of general standards of life.

The key problem, thus, is that the economic orientations of the government have changed. This instantly affected the investment environment, changing the behavior of investors. As a result, we obtained what we now have – a regulated and socially-oriented market system that, in the best case scenario, will grow at an annual rate of 3 percent. However, given the reality of Georgia's situation, this growth rate actually means nothing.

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