Economic regress: essence, causes and sources of its or

Ramaz Abesadze

Journal number 2 ∘ Ramaz Abesadze ∘
Economic regress: essence, causes and sources of its or

Summary

The main goal of the paper is to convey the essence, causes and sources of the "economic regress", an important event practically unstudied in the economic literature, to define the functions of the government as the "helmsman" of the economy and the reasons for the manifestation of economic regression in the economy of Georgia. To achieve this goal, the concept of "consolidated economy" is introduced and its essence is revealed. The research used methods of systematic analysis and abstraction.We associate economic regress, as well as economic development, with qualitative changes in the economy. Economic development is the transition of the economy to a new, qualitatively more perfect state, and economic regress is the transition of the economy to a new, qualitatively worse state. A consolidated economy is such an economy on which the combination of factors contributes to the improvement of the elements of the economic system and the interdependence between them, that is, the transition of the economy to a qualitatively new, more perfect state. When the degree of consolidation of the economy is violated under the influence of various factors, then there is an economic regress. The emergence of economic regress does not mean either economic decline and, moreover, not an economic crisis. If economic regression is eliminated, economic fluctuations will be eliminated. In the process of eliminating economic regression, the relevant measures implemented by the government are of decisive importance. In order to avoid or eliminate economic regress, the government must act as the "steer" of the economy. There are both objective and subjective reasons for regression in Georgian economy. The article talks about them in detail.

Keywords: Consolidated Economy, Economic Regress, Socialization of economy, economic developmen

Introduction

The word regress expresses the deterioration of the condition, delay in development. Therefore, economic regress means the worsening of the situation in the economy, the delay in its development. The phenomenon of economic regress is practically unstudied in the economic literature. Regarding this problem, there is only one article by Lamont University professor Amartya Sen at Harvard University - "Economic Regress" [Amarty Sen, 1993].

In this article, the essence of "economic regression" is not defined, and attention is shifted to its evaluation indicators, on top of that only on quantitative indicators. Therefore, the author associates economic regress with the deterioration of quantitative determinants. While nowadays in the literature, to indicate the deterioration of the quantitative indicators of the economy, concepts are successfully used, such as: economic decline, economic recession, economic crisis, however not economic regress. We associate both economic development and economic regression with qualitative changes in the economy. Economic development is the transition of the economy to a new, more refined qualitative state, while economic regression is the transition to a new, deteriorated qualitative state of the economy.

In order to better understand the essence of economic regression, we introduce the concept of "consolidated economy".

Consolidated Economy

The development of economic history shows that economy becomes dependent on more factors influencing it.For instance, if traditional economy was mostly influenced by natural factors (drought, flood, storm etc.), modern economy is very sensitive and strongly reacts not only on the changes of factors directly impacting the economy (technologies, capital, labor, forms of property, institutions etc.), but on the changes in external factors (social sphere, culture, education, art, sport, government policy etc.).Therefore, proceeding from the interests of economic development, a certain consolidation of these factors is required to direct economic system to stable development path and on this basis to steady economic growth. Such economic system might be called a consolidated economic system or simply consolidated economy.

Consolidated economy is such an economy, when the unity of factors influencing it promotes economic development, i.e. the transition to qualitatively new, more improved condition. The degree of consolidation strongly depends on the policies pursued by the government, which include both purely economic and non-economic directions.

Economic Regress

Each spillover of consolidation causes negative changes in the economy, it undergoes a qualitative decline, that is, the anti- development processes develop in it, which we call economic regress. Such an economy is not consolidated, because the total action of the factors acting on it in the economy leads to the transition of the economy to a qualitatively deteriorated state.

Therefore, during an economic regress, a negative charge is placed in the economy, which does not immediately lead to the deterioration of the quantitative indicators of the economy. But if regress is not neutralized, eventually it will lead to significant negative processes, including the economic crisis itself.

When considering the relationship between economic regress and economic growth, it is possible to have the following cases:

1. Economic regress is followed by economic growth. Mainly it is the result of prolongation of crisis (internal and external wars, social tension, incapable government etc.). Then the state takes into its own hands the reins of government enabling it to overcome social contradictions and reach a high rate of economic growth. But, at the same time economic regress gains strength and, finally, the transition to market system occurs again in evolutionary or revolutionary way (postcommunist countries). Practice shows that proceeding from circumstances economic regress may seem reasonable for a certain time. But if the reasons causing the regress are not eradicated, economic growth shall be slowed and ended in crisis.

2. Economic regress may result the slowing down of economic growth rates and finally economic decline. For example, radical deterioration of political and criminal situation is followed by the decrease of investments and, consequently, of growth rates, and finally without taking adequate measures economic crisis shall occur.

3. Economic regress over a certain period of time has no effect on economic growth (or does not seem to). For example, the growth of foreign and domestic debts and their inappropriate use, as well as the government's non-economic interventions in business, may not immediately have significant negative consequences, but gradually it will become the basis of many negative processes (irrational distribution of resources, corruption, nepotism, etc.). Gradually, the conditions are being prepared, first for reducing growth rates, and then for economic decline and crisis.

causes and sources of economic regress origin

An opinion may appear that the cause of economic regress is the existence of medium-term (Van Golderen, Kliment Jugliar, Simon Kuznets, Joseph Kitchin) and long-term (Nikolai Kondratiev) cycles. These cycles are natural and have nothing to do with economic regress. It is related to the intermittent nature of innovation. It is natural that innovations in this or that field do not have a permanent character. Innovations become obsolete over time and the period of economic growth slows down. The economy, with the joint action of entrepreneurs, scientists and the government, responds to this with new innovations and makes fundamental positive qualitative changes, continues economic development, as a result of which economic growth rates begin to increase again, hence economic cycles. It is naturally characteristic of the market economy and contributes to its development and perfection. Economic regress can be the cause of economic fluctuations.

Therefore, economic regress takes place when there are various causes of origin of economic regress, related to the current processes in the economy and society and market failures, as well as to unintentional or intentional mistakes made by the government. There are various causes and sources of economic regress origin, such as:

Heavy social conditions. When government is unable to create adequate conditions of life for the population, establish order, create prerequisites of stable economic growth. To find the way out of such situation will be possible by coming of new forces in government, taking all reins of government and quickly achieving a significant success. This may be implemented in the conditions of restriction of market economy or formally without the change in market.

The first option was implemented in the Soviet Union, which was initially followed by rapid economic growth, but a negative charge was placed in the economy, which eventually resulted in a return to market relations. We believe that if this transition had been carried out on time (which Stalin's government had already started), the events in the Soviet Union would have developed differently.

Was there a market during the Soviet Union? It is wrong to say that there was no market at all under socialism. Where there is an exchange of goods, there is also a market in some form. But it existed in the Soviet Union in an extremely limited form. In this case, many functions of the market were replaced by the state, but it, although under conditions of great restrictions, still relies on the demands of the market. With great obstacles, but still, the funds flowed to those areas where the demand was greater. Prices were set by the state, but to some extent it still relied on the law of supply and demand. Private property was outlawed, but it still existed as private property and in the shadow economy.

It is true that the enterprises were in common ownership, but the management group treated them as private property, as a result of which they received illegal income from their "business" activities. Therefore, there was a layer of employed in the enterprises, who to a certain extent represent the carriers of the qualities of businessmen [Papava... 2002]. In principle, their activities were related to positive qualitative changes in the economy, certain progress (improvement of technologies, weakening of the rule of the bureaucracy, creation of prerequisites for transition to a market economy, perfection of formal institutions, etc.). The existence of the market is also indicated by the existence of agricultural property and an independent agricultural market.

It should also be noted that until 1927 there was private property in the Soviet Union (in accordance with the new economic policy) and then, until 1956, the entrepreneurial sector of completely different directions (food industry or metal processing industry, jewelry or chemical industry), crafts and enterprises (crafts), which play an important role in the economy of the Soviet Union. Construction bureaus, experimental laboratories, scientific research institutes, non-governmental organizations functioned in the entrepreneurial sector. Pension system, artels gave loans, etc. The government of that time, it seems, was aware of the negative consequences of economic regression and helped to develop the economy. He was involved in the development of private property and the strengthening of the government's activities. If this business sector had not been destroyed and had been strengthened in 1956, there would have been a strong economic rise in the Soviet Union.

It can be said that the economy of the Soviet Union was an extremely limited market economy, which is why it was called a non-market command-administrative economy.

What were the main shortcomings of the command-administrative economic system, which prevented the further development of the economy? This question is answered in the works of well-known representatives studying these problems [3; 4; 5], the basic essence of which is as follows:

As the economic function of the state replaces the market mechanism, a unified center is forced to process a huge amount of information for the issue of orders to each economic agent. However, an organization, no matter how unique its capabilities may be, could not do this without incurring losses. because the environment in which the economy functions undergoes constant changes, due to which the factors affecting it are constantly changing. It is natural, because of this the plans cannot be completed and chaos begins - the available economic resources are used very irrationally. The market economy, through the price mechanism, solves this problem almost automatically.

During the planned economy, there are also large transaction costs, which will be spent to maintain the huge bureaucratic apparatus necessary to receive planning tasks and carry them out.

Due to the prohibition of private property and entrepreneurship, the creative ability of people is almost completely ignored, although individuals still manage to develop their own abilities. But this is happening in a shadow economy, whose ups and downs are also costly.

Under such conditions, the logic of economic development leads to totalitarianism, i.e. to a system where all branches of human activity obey the government, which is also connected to transactions. Due to the increase in spending. In such conditions, due to the low level of wages, corruption gradually appears and develops, which becomes a general rule for the entire society and even becomes a tradition. The so-called "bureaucratic", i.e. "administrative" market is being formed, where not only material values are sold, but also "power" and “handicraft” [subordinate], “rules and its violations”, etc. Due to the repetition of such changes over the years, the corresponding customs are formed in the society, an unwritten law is created, which has the greatest influence on human behavior.

Such a style of farming creates a constant deficit for both producers and consumers, which in itself leads to the dictation of production over consumers. There are rows, "subsidiary production" and so on.

The state shows strict regulation of individual enterprises and, at the same time, care for them. It is true that every enterprise suffers from a lack of resources, but it can work even at a loss, it will never go bankrupt, because the government necessarily helps and relieves the distress. In such conditions, the quality of the products deteriorates, because of this, people who are bored with queues buy everything.

The constant excess of demand for supply leads to an increase in the money supply and its multiple excess compared to the commodity supply. Inflationary processes caused as a result of such imbalance are suppressed by force, through fixed prices. There is hidden inflation, which finds its expression in queues, coupons, cards or other forms of distribution of scarce goods.

During the centralized planning economic organization, the state takes a relatively small-slow participation in international economic relations, which leads to the so-called "black market" of foreign currency. Also, it is clear how big losses the country is concerned due to the separation from the world economic processes. On the one hand, the all-round dependence of individual people on their authorities and, on the other hand, the state's care for them, causes infantilism and incompetence, the type of people looking for orders and care, etc.

The hard restriction of the market economy was implemented in another way in Germany. The hard economic and social situation, the economic crisis of 1928 contributed to Hitler's victory. The classical market economy was powerless to get out of the situation without strengthening the role of the state in the economy. In Italy, the reason for this was the defeat in the First World War, the loss of colonies and international conflicts; economic and social crisis; The inability of the leadership to bring the country out of the crisis. There, the economy developed on the basis of private property and private entrepreneurship, but all this is subject to the demands of the government. The government controlled all areas of the economy. Private property was also restricted [Payne...1995]. Firms were so specialized in their activities that they did not belong to either private or state ownership.

Forcible change of market economy or transplantation of another economic system. After the establishment of the Soviet system in Russia, he joined the countries that were part of the Russian Empire and a socialist order was established everywhere, as a result of which a strict preparation of the market economy was implemented in these countries. A similar event took place in many other countries of the world in the following years of the war.

Wrong economic policy. It can be manifested in different ways:

Socialization of economy. During the mixed economy, the role of the state in the economy grows, and sometimes it passes into the socialization of the economy, which is followed by the concentration of power in the hands of the state, which in itself limits the economic freedom and is the source of many negative events. Finally, we will have to deal with economic regression, which will be followed by economic crisis. It is possible to look for the reasons for this in economic paralogisms (unintentionally taking wrong measures with wrong logic) [Papava...2009], people in power and society in general. In the mentality of the DOE, in the pressure of interest groups, in the weaknesses of democracy [Baltserovich... 2004.].

Economic freedom should not be confused with political freedom, since it is possible to have an autocratic government in the country, but at the same time to have complete economic freedom (i.e. Lithuania, Singapore and Taiwan, at one time South Korea). The opinion is expressed that democracy should thank capitalism (that is, freedom in economics) and not vice versa [Baltserovich...2004;Friedman...2006; Schumpeter...1949]. To some extent this is true, capitalism has brought democracy, because democracy cannot be achieved without economic freedom, but without democracy economic independence may not exist or cannot be maintained for a long time.

Wrong tax policy. The sub-optimal size of the tax budget reduces investments, hinders the improvement of technologies, the implementation of innovations and, therefore, economic growth or reduces revenues in the budget, which prevents the state from performing its functions, which is also followed by a decrease in economic growth rates.

Isolation from the outside world, strict protectionist policy. Such a policy is followed by the limitation of investments, underdevelopment of technology, reduction of innovations, reduction of competitiveness,

Inadequate funding of science, education and innovation. Education and science are the foundation of development. The well-being of the society is inextricably linked to the innovation. It led to unprecedented progress in all spheres of human activity and daily life. It can be said that the process of economic development is the process of implementing innovations in all elements of the economic system. Innovative economy is based on knowledge, flow of innovations, constant perfection of technologies, information, institutions, human capital, production organization, products, etc. on intellectual work of scientists and innovators

Hinders the functioning of the economic system. It gives rise to many negative events: shadow economy, nepotism, corruption, etatism, etc.

The wrong economic policy of the government also includes: popular promises offered by politicians during elections; wrong anti-monopoly policy; non-economic intervention of the government in business; violation of private property; Incorrect agrarian, monetary-credit and budgetary policy and others.

Unfair globalization. It can have a very large negative impact on the economy: limit national production, slow down technological progress, reduce human capital, deplete natural resources, etc. In addition, negative processes of a global nature also have a negative impact on the national economy, etc.

Failures of the market economy. The problems of failures of the market economy are widely discussed in the economic literature. We will only find out that, if these problems are not eliminated in time, regressive problems will arise in the economy. For example, if the problem of poverty and inequality of income distribution is not solved in time, it may lead to an aggravation of the social and criminogenic situation; Failure to take into account ecological requirements - deterioration of natural resources, physical and human capital, reduction of production, etc.

Chaotic nature of the economy. It is the most invisible source of economic regression, which cannot be completely eliminated. It is difficult to predict the regression caused by chaos not only before the crisis, but also during the crisis and even after the crisis (for example, many reasons for the great economic depression and other crises are known in economic theory). There are a large number of economic agents in the market, whose activities are completely free within the framework of the "rules of the game" established by the government. It is true that the market economy is governed by different types of laws that give it stability over a certain period of time, but the activities of each agent and their aggregated action do not always correspond to the requirements of economic stabilization. It is possible to cite many examples of chaos. But, at the same time, the chaos of the market gives the opportunity to use the market mechanism. Therefore, the goal of the state should not be to eliminate chaos, but to detect its negative effects and to avoid them or overcome the existing negative results as quickly as possible and with less losses.

Change in natural conditions. Is the decline caused by changes in natural conditions (drought, floods, lack of harvest, reduction of raw materials, etc.) a source of economic regression? Of course, it is to a certain extent, since in this case, there is an economic decline, i.e. negative quantitative changes, it turns into negative qualitative changes. For example, unemployment and poverty increase, which reduces the country's human capital and causes social tension, etc.

Wrong foreign policy. A policy aimed at confrontation with neighboring states, especially large states.

In addition, the source of economic regression can be outdated technologies, production methods and forms; Rapid and large-scale change in the exchange rate; Underdevelopment and failure of the market infrastructure; Undocumented emission of money; Budget deficit; Large internal and external debt, overpopulation, etc.

Indicators of economic regress

Economic regression is not necessarily followed by deterioration of the quantitative indicators of the economy. On the contrary, sometimes economic development takes place in conditions of economic decline (for example, in the first stage of post-communist transformation, during economic cycles, etc.). Thus, we cannot use the deteriorated final quantitative indicators (such indicators are used during economic decline, economic decline, economic crisis) to assess economic regression. Economic regression assessment indicators are related to the causes and sources of economic regression. Such indicators are: Deterioration of social and crininogenic tension, strengthening of socialization of ecobomics, deterioration of institutions, corruption, nepotism, statism, deterioration of technologies, physical and human capital, reduction of expenses, non-economic interference of the government in business; violation of private property; Incorrect agrarian, monetary credit and budgetary policies, etc.

State as „steering“ economy

Economic regression can occur in any, even the most highly developed economy. Therefore, it is necessary to constantly drive the economy. For this, the state should perform the function of "steerman" of the economy, in order to avoid economic regression and related economic fluctuations. Based on the daily analysis of the determinants of economic regress, appropriate measures should be implemented. scientists and business should be engaged in this process.

The establishment and maintenance of a consolidated economy, i.e. an economic system oriented towards development, first of all, depends on the creation of a sound economic system based on the market mechanism. In order to implement such an economic system, the country should ensure: freedom of entrepreneurship, dominance of private property and its inviolability, transformation of business into a field of creative activity, healthy finances existence, development of science, coordination of scientific-technological potential in the state and private sector. Among the regulatory instruments of the state, priority should be given to innovative instruments, etc.

Reasons of detection ofeconomic regress in economy of Georgia

As an example of the detection of regressive processes in the economy, along with other countries, Georgia can be used, where there were both objective and subjective reasons for the detection of economic regression [eg: Asatiani...2014;Burduli...2012; Berulava...2011; Papava...2002; Papava... 2005; Papava...2013; Chikava...2013; Chitanava...1999; Meskhia I...1996; Silagadze...2013; Tsereteli G...2003; Abesadze...2011; Abesadze...2009]:

Among the objective reasons, we can mention: implementation of a transformation still unknown to world history; termination of old economic relations and absence of new ones; difficulties related to simultaneous transition to a new economic system and restoration of statehood; complex geopolitical arrangement of the country; In some cases, the competence of international organizations is insufficient..

Subjective errors can be distinguished:Wrong internal and foreign policy of state carried out at initial stage; Carrying out ineffective measures to fight against criminal elements for a long time, due to which the severe criminogenic situation continued for years; Uncomplexity and non-systematic nature of economic reforms; Misperception and implementation of liberal policies; Choosing the wrong way to implement reforms; After the introduction of the transitional currency - the coupon, the implementation of an incorrect money-credit policy (completely unjustified money and budgetary emission, misuse of foreign credits) was carried out, as a result of which strong devaluation of the coupon – hyperinflation; After the successful implementation of economic reforms in the economy of Georgia in 1995-1997, the reforms were still conducted incorrectly, the inefficiency of the regulatory functions of the state. As a result, the level of corruption increased, the business racket strengthened, financial, budgetary and energy crisis occurred, the criminogenic situation worsened, etc.; Ineffective use of significant international aid, which also marks the entire transformation period as a red line; Indifference to small business development; Neglecting rural problems for years; War with Russia; Mistakes made during privatization; Violation of the principle of inviolability of private property (which is the cornerstone of the market economy); Effective abolition of antimonopoly legislation; Increasing income inequality; One of the most important mistakes would be to neglect the path of innovative development of the economy, which was recognized only in 2013 and important steps were taken and are still in this direction.

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