Journal number 4 ∘ Teimuraz Beridze ∘
On the Transitional Period in Economy

The article deals with the topical issues of the theory and methodology of transitional economy. There is found the necessity of developing the theory of transitional economy and indicators reflecting the development of the transition period. Special attention is paid to the issue of ownership and management in transitional period and the need of vision of the results of the transitional period in economy.

Keywords: Transitional Period in Economy; “Transitology”; “Washington Consensus”; Ownership; Property Rights; Postindustrial Development.

JEL Codes: A1; A10; A11

Today, two decades after the beginning of the so-called “transitional period” from a command economy to a market economy, in a society of countries (and there are 26 of them with almost 300 million population, without of China), who have made such a transition, legitimate questions arise about the correctness and effectiveness of the taken steps. In this integrated world post-communist countries will play a key role in economics, politics, culture and social life.  Therefore, there is a need for an objective assessment of what we have received as a result of this socio-economic transformation in the post-Soviet space.It should be recognized that there is an objective need to develop a “theory of a transitional economy.” Today, the development of such a theory with its importance can be compared with the development in its time of the basic theories of economic science. (20) (8) (10) (2) (18) (21).

The economy of the transitional period has a number of specific characteristics that differ from economies in a stationary state and developing on their own basis. In particular, in the transitional economy, newly emerging institutions replace connections and relations of the old ones. As a result, new macro- and microeconomic patterns and trends, social and political changes, a new content of economic policy are emerging.

There was also an economic scientific discipline (transitology) the subject of which is the problem of economic transformation, and the object – the economy of a country or countries in the process of transition from one state of the socio-economic system to a qualitatively different state. For obvious historical reasons, the focus of scientists-transitologists (the term “transitology” was proposed in 1992 by Michael Buravoi (1)) deals with the transition from a centrally planned socialist economy to a capitalist market economy, considered in close connection with political, socio-cultural and other aspects.

 Actually, the problems of the transitional period were still posed at the beginning of the 20th century in the works of the Marxist trend – K.Kautsky “On the Day after the Proletarian Revolution,” (2), N. Bukharin “Economy of the Transition Period.” (22). However, these works had two drawbacks: the problems of transition were interpreted in them in a straightforward manner and, in fact, were reduced to an analysis of only the problems of the transition from capitalism to socialism.

The practice itself "gave birth" to various theoretical and methodological approaches to transformational processes, which ultimately come down to two major trends, schools: this gradual, "gradualist" (from the English word “gradual”) transition to the market (more cautious and piecemeal approach to reforms), and the transition to a market in forced mode – the so-called “shock therapy,”(radical reforms and rapid transformation) or simply the set of specific steps, postulates developed in 1989 by the International Monetary Fund (IMF), the World Bank and the US Treasury for Latin American countries and referred to as the “Washington Consensus” (4).

According to the author of this consensus, John Williamson, he included 10 steps by governments: strengthening of financial discipline, revising the priorities for the distribution of public wealth in favor of the poor, tax reform, interest rate liberalization, the introduction of a more flexible exchange rate, liberalization of foreign trade, investment, privatization, deregulation, maintenance of property rights. (5)

Over the years, the UN General Assembly has debated country classification issues. For example, in 1971 the General Assembly identified a group of Least Developed Countries to be afforded special attention in the context of implementing the second UN Development Decade for the 1970s. Follow-up UN conferences have monitored progress in addressing the development challenges in these countries. However, the General Assembly has never established a development taxonomy for its full membership. In contrast, international organizations have established such taxonomies, and in this section the development taxonomies used by three such organizations—the UNDP, the World Bank, and the IMF—are explored.

The UNDP’s country classification system is built around the Human Development Index (HDI) launched together with the Human Development Report (HDR) in 1990. To capture the multifaceted nature of development, the HDI is a composite index of three indices measuring countries’ achievements in longevity, education, and income. Other aspects of development—such as political freedom and personal security—were also recognized as important, but the lack of data prevented their inclusion into the HDI. Over the years, the index has been refined, but the index’s basic structure has not changed. In the HDR 2010, the income measure used in the HDI is Gross National Income per capita (GNI/n) with local currency estimates converted into equivalent US dollars using PPP. Longevity is measured by life expectancy at birth. For education, a proxy is constructed by combining measures of actual and expected years of schooling. Measures of achievements in the three dimensions do not enter directly into the sub-indices, but undergo a transformation.

The problem of the “transition period” in the economy, strange as it sounds, is also old, if we mean, say, the transitional state of the 1920s in the USSR, or transitional periods of social development in the countries of industrial development, or transitional periods of social development in the countries of industrial development, where the level of industrial development was the cornerstone of the periodization of the development of socio-economic systems, and the new one, if we mean the last decade of the 20th century and the beginning of the 21st century, marked by a transition from planned, centrally regulated economy to an economy based on market principles(14).

“Transitional state” in the natural sciences is one thing, and in the social sciences it is fundamentally different, since the essential point of the latter is precisely social relations, relations between people.    

In our analysis, we confine ourselves to the question of methodological approaches to the study of the phenomenon of the transitional economy. These are such principles as: a) the complexity, the integrity of the study of the transitional economy; b) disclosure of the very content of the transitional economy, its structure; c) its quantification; d) vision of the final results of this process.

First of all, a terminological definiteness should be established regarding the phenomenon of “transitional economy.” Two terms are used in Western economic literature – “transitional economy” and “emerging markets;” in the latter, in addition to the transition countries there are included also the countries of the so-called “third world.”

The concept of “transition,” “transitional period,” “transitional state” should be defined. In social science it is somewhat conditional. “The transition from what?” “Transition to what?.” What is the content and quantitative aspect of the “transition?” When does the “transition” begin? When does the “transition” end? What is the specificity of the “transition” in the economy and in society as a whole? These processes should proceed in synchronous mode or at different rates?

If, under the transition is understood as a change in the form of ownership (in this case, public to private), then it is necessary to see the difference between the legal and economic content of property relations. In the first case, the main content is the ownership of the property object to the subject (what to whom) - the state, an individual, a group of persons (here we recall the postulate in the famous "Coase theorem": it is not so important how the property is distributed, it is important that the property rights are clearly fixed), in the second case – in economic one, the main content is the effectiveness of the use of this property (which is how). In other words, the form of affiliation is important for a lawyer and its content for an economist. In other words, for a lawyer the form of ownership is important, and for an economist – its content. That is why privatization, which is the main means and form of property change, should not become an end in itself in the transition to the market, but only its tool – an instrument in the creation of an effective owner.

Following the logic of compulsory separation of the core in property relations, it is necessary to recognize that the dominant form in property relations in the transition economy (along with others) are private property relations laying the foundations for future economies.   

An important issue of the content of the transitional economy and society is its social structure. After all, new property relations give rise to a new social structure. The class approach to its content proposed in the past is well known and was largely a reflection of past relationships. The issue of the difference between the social structure of the transitional society and the social structure of the already formed modern market economy is also relevant here. The social structure of the transitional society represents the interaction of the subjects of the old system of relations and the subjects of the emerging system of relations. Despite the fact that these subjects are the product of economic relations, their transformation is much more complex than the transformation of purely economic forms.

Among the issues related to the substantive side of the development of the transitional economy should be highlighted the problem around which revolve all other issues, and such a problem, in our opinion, is the awareness of the role of the state in the economy in general, and particularly in transitional one. (4;15) Today, there are no countries with absolutely market economy (without state meddling) anywhere (except in textbooks on macroeconomics), market economy, in our opinion, a priori and immanently implies the participation of the state in economic processes. This has been demonstrated by the current economic and financial crisis in the world, the overcoming of which is sought in the bowels of governmental structures of the state and international economic and financial organizations. The question arises: where is the market automatism of the way-out of the crisis? It simply does not exist, and cannot be due to the immanent properties of the market.

The principal issue in the transition countries is the way to manage their societies and the state. Immediately at the beginning of the transitional period, a policy of democratization of society and the political system was proclaimed, without taking into account the traditions and mentality of the population. In almost all countries in transition, democracy has been proclaimed as a way of governing society and the state. But unfortunately, we must admit that in almost many transitional countries we have received a formal democracy (or substantive democracy is a form in which the outcome of elections is representative of the people. In other words, substantive democracy is a form of democracy that functions in the interest of the governed) and a parliamentary system as a way of coming to power and retaining it.

In our view, the most correct assessment of the adequacy of the transition period is its quantitative assessment, which will make it possible to judge the success of the process, its time frame and content. Ultimately, it is a question of assessing the effectiveness of economic policies in the transition process. What indicators can reflect the success or failure of the transitional period in the economy?

In General, the problem of indicators has different aspects: indicators can be techno-economic (financial-general), material and socio-economic. The first is the quantitative changes in production and its results (production of products per unit of labor). Then there are the production indicators of technological or power equipment. There are indicators of development costs, primarily investments in production. There are indicators of results, for example, for the most important types of products (steel, aluminum, grain, etc.). Finally, indicators are reflecting the overall result.

       An independent, an important “section” of the indicators of the economic performance of the society are socio-economic indicators: availability of jobs, the level of personal (family) consumption of goods, the level of cash income (and wages), housing, income stratification, the level of poverty (below the minimum subsistence level, the level of survival), the degree of intensity of work, the availability and amount of free time, the level of education, etc.

Graph 1 - Unemployment rate in Georgia (%) 2006-2017

 

Source: National Statistics office of Georgia http://www.geostat.ge/?action=page&p_id=145&lang=geo

In graph 1 there is shown that in 2017 the unemployment rate in Georgia decreased by 0.1 percentage points compared to 2016 and equaled 13.9 percent. It should be noted that the downtrend in the unemployment rate is maintained during the last eight years. In 2017 the economically active population constituted 65.8 percent of the working population (population of 15 years and older). Compared to 2016 the economic activity rate and employment rate decreased by 0.5 and 0.4 percentage points, respectively. The employment rate in urban settlements decreased by 1.5 percentage point compared to the previous year, while increasing by 0.8 percentage points in rural areas. Similarly, compared to the previous year the economic activity rate in the urban settlements decreased by 1.6 percentage points and increased by 0.8 percentage points in rural areas.

            Graph 2 - Poverty Level in Georgia (%) 2006-2017

Source: National Statistics office of Georgia http://www.geostat.ge/?action=page&p_id=145&lang=geo     

Graph 2 shows the share of population under absolute poverty line by percentage in 2006-2017 in Georgia, which is 21.9% according to the recent indicator, which is increased by 0.9 percentage points compared to the previous year.

It is not about the systematic of indicators, but it is important to emphasize that the result of the economic activity of society cannot be expressed by any one indicator, but rather assumes a systematic approach within the overall context of the study (3;15)

Today, the number of indicators reflecting the functioning of enterprises (firms, companies) is reduced to a minimum, practically operate only with profit at the micro level, and GDP at the macro level.

If we take the macro level, we note that the value of GDP is affected by fictitious capital, which occupies a large place in developed market economies. In General, GDP is not the gross product itself, but rather an uncertain amount of money “contribution” of any branches of labor activity (if you take a Bank, an insurance company, a money-changing office, a service office, etc.) for labor activity. The more such units are the higher the GDP is.  GDP is a consolidated financial indicator that can say something (not all) about the dynamics of a single country and then only when involving in the analysis of many data, in particular the share of production in GDP. The high GDP per capita still says little about a country's position in the “world economy.” The volume of exports (per capita) is also of no independent importance.

 GDP in the countries with the transitional economies

Table 1

Source: UN/DESA, based on data of the United Nations Statistics Division and individual national sources. (7)

Note: Regional aggregates calculated at 2010 prices and exchange rates.

a) Average percentage change.

b) Partly estimated.

c) Baseline scenario forecasts, based in part on Project LINK and the UN/DESA World Economic Forecasting Model.

d) Georgia officially left the Common wealth of Independent States on 18 August 2009. However, its performance is discussed in the context of this group of countries for reasons of geographic proximity and similarities in economic structure.

e) Starting in 2010, data for the Ukraine excludes the temporarily occupied territory of the Autonomous Republic of Crimea and Sevastopol.

Gross Domestic Product (GDP), Georgia 2010-2018

Table 2 

 

Source: National Statistics office of Georgia http://www.geostat.ge/?action=page&p_id=145&lang=geo

Table 2 describes that in Q2 2018 the real growth rate of Gross Domestic Product (GDP) amounted to 5.5 percent yearon-year, while the GDP deflator increased by 4.8 percent. The nominal GDP totaled GEL 10 168.4 million. The real GDP growth amounted to 5.4 percent for the first half of 2018.

In the following Diagram there is shown the GDP structure by the Q2 in 2018 in Georgia. Real growth was registered in the following activities: Financial Intermediation (22.0 percent), Other Community, Social and Personal Service activities (17.9 percent), Real Estate, Renting and Business Activities (13.8 percent), Wholesale and Retail Trade; Repair of Motor Vehicles, Motorcycles and Personal and Household Goods (10.5 percent), Manufacturing (8.5 percent), Mining and Quarrying (8.1 percent), Transport (8.0 percent), Education (4.8 percent), Hotels and Restaurants (4.5 percent), A decrease in the real value-added occurred in Construction (-7.1 percent), Agriculture, Hunting and Forestry; Fishing (-3.3 percent).

The largest shares of GDP by activity are held by Industry (17.1 percent) and Trade services (17.0 percent), followed by Transport and Communication (9.9 percent), Agriculture, Hunting and Forestry; Fishing (8.5 percent), Construction (8.3 percent), Public administration (7.9 percent) Real Estate, Renting and Business Activities (6.7 percent), Health and Social work (5.9 percent).

Gross Domestic Product (GDP) by sectors in Georgia Q2 in 2018

Diagram 1 

 

Source: National Statistics office of Georgia http://www.geostat.ge/?action=page&p_id=145&lang=geo (24)

If we take the micro-level, it should be recognized that the focus only on profit does not reflect all aspects of the functioning of enterprises, for example, does not take into account the technical-economic and technical side of the efficiency of the enterprise, etc. The Current situation at the micro-level of the economy in the transitional countries once again confirms the importance and need for internal planning, and this requires a whole system of indicators reflecting the level of efficiency of the enterprise.

What will we get after the “transitional” economy or more correctly, what should we get as a result of the “transitional economy” and what we have received today? Here you cannot limit yourself to economic results, but should see the result as a whole, in all its manifestations (political, socio - cultural, moral, etc.).

From the point of view of the economy, the result should be the formation of a market economy with all its attributes and institutions. Here we note that there is no constantly functioning market economy (as well as any other economy) due, first of all, to its cyclical nature of development and the action of its fundamental principle – supply and demand. After all, at least bringing demand and supply into balance needs a certain time and during this time the economy cannot be as effective as possible; secondly, the transitional economy is added to the objective circumstances of the transition difficulties: political, economic, social, cultural, etc.; thirdly, the factor of action of the subjective factor is also important, which can negate even properly developed solutions.

What should be the result of the transitional economy? This economy should be fundamentally different from the economy of the capitalist type characteristic of the second half of the 20th century. It should be a post-industrial type, taking into account the new, fifth technological structure (1985 – 2035), and given the limited resources in the world economy, the following tasks will come to the fore: a) long-term increase in resource productivity; b) solving energy problems; c) fair distribution of income. The fifth way: information and communication technologies, microelectronics, software, automation and telecommunication equipment. The sixth way – the use of the sphere of human thought (no-sphere) or biocomputer, compatible with the human mind (intelligence).

       The point of view of Professor G. Popov is interesting in this respect: “Capitalism could never defeat socialism. Socialism was a more progressive system than capitalism, and could only be defeated by an even higher system, which is often called post-industrial.”

What do we have for today? Despite the universal nature of the tools of transition to a market economy, different results are obtained in different countries. In the countries of Central and Eastern Europe this is one thing (relatively high economic growth), in the territory of the former USSR it is another (lack of vision of the final results of reforms), in the case of China - the third (the old political system and new economic relations, and unprecedented economic growth, though recently somewhat slowed). Regarding Georgia, let us say that today the economy of Georgia is given at the mercy of the actions of natural factors, and all this is done under the slogan of protecting liberalism in the economy and democratic values in general, thereby downplaying the very idea and the possibility of a normal market economy. And in the “system” of the estimated indicators of the socio-economic development of the country, ratings of all kinds have become the main element (11;12;19).

And the last thing. There is always the danger that as a result of the transitional period in society and the economy, we can get a type of society, a state that may be on the margins of economic and historical progress, and whose function will be to implement the complementary tasks facing industrialized countries. And in order to avoid this, a huge responsibility lies with the governments of the countries that once were a part of the socialist system.

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