Journal number 4 ∘ Marina Tabatadze ∘ Malkhaz Chikobava ∘
State Strategy of Economic Rehabilitation During a Post-crisis Period

10.36172/EKONOMISTI.2023.XIX.04.Marina.Tabatadze/Malkhaz.Chikobava

Annotation.The paper discusses the governance standards of the modern world economy and 01003019427the strategies of its stable development. More precisely, it assesses the issues of correct coordination of global economic systems in a crisis environment and the optimal distribution of functions between individual levels of socio-economic systems. The perspectives of the national economy are discussed based on the analysis of international and EU expert assessments, ranking organizations and opinions of various researchers. Empirical research evaluates the global trends of crisis management and studies the example of Georgia during and after covid-19 pandemic crisis. As a result of this research, the forecasts of the economic development in the post-crisis period are given and the optimal development strategy in the non-ordinary environment is defined. Useful recommendations are developed for scientific researchers and the state practitioners who work on state regulation of the economy and post-crisis rehabilitation.

Keywords: state governance, state regulation of crisis, crisis management, political and economic stabilization, post-crisis strateg. 

Introduction 

The current pandemic crisis due to the covid-19 appeared to be different from previous experiences in number of ways. First, it highlighted its transnational and origin-specific nature. Second, it was the first case when non-economic factors caused an economic crisis. Third, and due to the above-mentioned reasons, it turned to be particularly difficult to predict. In such situation, crisis management imposed the provision of a continuous chain of global information transmission and the need for interstate coordination of relevant governance structures. The issue of rational management of the economy and structural transformations were intensified. Among the existing problems, three important issues were highlighted: conducting an independent monetary policy, ensuring capital mobility with open financial accounts, and exchange rate stability.

Taken the unique character of the current economic crisis, conceptual studies of crisis and post-crisis period management are extremely important, yet rare. Accordingly, the aim of this work is to predict the stabilization of economic development during the post-crisis period and, more generally, to determine an appropriate strategy of development in an abnormal environment. To do so, it analyses national anti-crisis reforms and their compliance with global or European standards. It proposes a case study of crisis management in Georgia and suggests a new framework for managing transformational processes in the post-crisis period. Therefore, the results of the research are needed for both the scientific circles and the government to develop the right economic development strategies.

The findings of this research show that the rates of economic recovery are different depending on the severity of the crisis itself, but also on the severity of economic fluctuations and the range of declines within the country. They also vary according to the specifics of countries economic structures, the effectiveness of economic support policies and other factors. Despite the unified crisis management strategy after the world pandemic, the difference in its economic results can be explained by the different level of development of countries and the heterogeneous social responsibility of different societies. The findings also show that in the post-crisis period the search for the economic growth gives place to balancing of the economy and to diminishing the negative effects of the crisis. The post-pandemic rehabilitation programs of individual countries need to be elaborated individually, but withing a close collaboration. As for the developing countries, the findings suggest that a crisis environment, can be used as a helping hand, to review the priorities of country’s economic and fiscal policies and, ultimately, changing the country’s positioning into the world marketplace. 

Literature review

Theoretical foundations of crisis management 

The unipolar system of governance is losing its power in the modern economic world to the decentralized relationships. As a result, new elements of economic nationalism are being formed (Tabatadze, 2020). The contemporary process of deglobalization has been particularly emphasized by the pandemic crisis, which has stressed further the unstable nature of integrated economic systems (Valinurova et al., 2021). Along with the dependence of countries on the world markets, the importance of their autonomous functioning and neighborhood policy has increased. The increase of countries' dependence on external shocks has increased the role of the economic and political activity of the government and the importance of the functioning of the centralized management system (Tabatadze, 2016).

The theoretical foundations of crisis management and, in general, economic regulation, are undergoing significant adjustments. Classical standards are transformed and, in some cases, completely rejected (Tabatadze, 2022). It is also argued whether a large-scale functional load for monetarism is rationally justified, or how correctly the direct connection between the money supply and the price index is defined (Durcova, 2021). Paul Krugman (2021) believes that "the doctrine that the supply of money rules everything has never been supported by evidence". According to Jerome Powell, there was a very strong correlation between monetary aggregates and inflation or economic growth when this relationship was first analysed. However, economy and monetary system have changed since, breaking the correlation between the money supply and economic growth (Chugunov, 2021). Neoclassicists (Branson, Drobny, Rogoff) believe that inflation depends on the money supply only in closed economies or during strong exogenous factors, such as pandemics and wars. The basis of Friedman's monetarism is called into question – is there a need for the permanence of money circulation? The linear relationship between inflation and money supply is thus broken. It is argued that the change in the money supply does not momentarily affect inflation, and the transmission mechanisms are not linear (Levina, 2002). Since the 80s, the increase in the money supply, contrary to the opinion of monetarists, was accompanied by a decrease in inflation (Chugunov et al., 2021). Friedman explained this irregularity by the fact that due to the reduction of the interest rate, the price of money on hand also decreased. Indeed, the financial markets were characterized by such irregular process during the first year of pandemic crisis.

When it comes to the role of policy in crisis, management, scholars disagree on the optimal solution. Some argue that monetary policy-based stabilization policies are more effective in ensuring macroeconomic stability. Crisis management is based on different standards depending on the extent of integration of countries into global systems and on their level of development. Developed countries, due to their strong economic potential, are relatively resistant to changes in world markets, while poor countries, due to their dependence on powerful countries, act as consumers in the world systems (Tabatadze, 2022; Valinurova et al., 2021; Shatnawi, 2021, Abbes, 2019; Adomnicai, 2019). Some argue that regardless a similar negative impact of the pandemic on the global stick market, significant differences can be noted among countries, with least developed economies being the most impacted. Indeed, the stability of developing economy is very sensitive to external shocks and global transformation processes. This sets new standards for interstate relations and offers completely different forms of cooperation to society. Countries are positioning themselves in a new way in the global system and the economic status of their participation in this system is changing.

More than the stability of its economic system, a developed society is characterized by the important role of the state in risk prevention (Adomnicai, 2019). The regulatory function of the government increases significantly in the process of developing a complex anti-crisis strategy and managing crises both in its active and post-crisis rehabilitation stages. A large scale of the modern crises made it necessary to cooperate between state authorities and even between the academic researchers. This includes joint research, common actions and mutually coordinated, complex development of anti-crisis strategies. Some authors argue that determining the anti-crisis strategy is a process of predicting the crisis and overcoming it by respecting the goals of each participant and an objective trend of their development. (Tabatadze, 2016). In the anti-crisis program, the state's economic functions and crisis management mechanisms should be transformed based on the specificities of the current processes and the requirements for economic stabilization (Shatnawi, 2021). Scholars also highlight the need of a formula-based method of fund allocation which takes into account the social and economic impact of crisis at a local level (Matuszak et al., 2022). 

Research Method

The present research evaluates the global trends of post-pandemic crisis management and studies the example of Georgia during and after covid-19 pandemic crisis. Taken the unique character of the current economic crisis, we opted for an exploratory study. With the aim to predict the stabilization of economic development and, more generally, to determine an appropriate strategy of development in an abnormal environment, we analyze global anti-crisis actions and national anti-crisis reforms and their compliance with global or European standards. We propose a case study of crisis management in Georgia and suggest a new framework for managing transformational processes in the post-crisis period.

Main results of the research 

At the first stage of the crisis, restrictions were defined as the main mechanisms to cope with the effects of the crisis. Studies have shown that countries with severe restrictions and, therefore, high restrictions index, experienced a sharp decline in GDP, driven by lower consumption (Kavvadi, 2022; Shatnawi, 2021). During the recent pandemic crisis, the magnitude of the fall in GDP was relatively small (2-6%) in countries with severe restrictions (with an index of 55-65) and the economic decline was 12-20%. This classical standard of correlation between the severity of restrictions and economic activity was broken only in China, where, despite the strictest restrictions, the economy's decline was equal to the world average. The figure 1 presents the results of the restriction strategy on different elements of economy using a normalized coefficient. It compares the results with and without the control of Covid-19 cases.

Figure 1. Lockdown and economic activity indicators

Source: International Monetary Fund, World Economic Outlook, 2020

Georgia showed one of the best results of global crisis management in the world. This experience has become a precedent for other countries. Few success stories can be mentioned: Not a single large enterprise stopped operating in the country; international reserves increased by 11.5% and local exports by 3.5%, 1,056 million; the trade deficit improved in dollars and amounted to 4.7 billion dollars, as a result of the effective monetary policy. In 2021 the international credit rating company Fitch left Georgia in the BB category of the economic stability according to the ease of doing business and the attractiveness of the business environment, maintaining the investment environment, ensuring resilience to external shocks.

A key success factor can be identified as the government's attempt to maintain a balance between managing the pandemic and minimizing the economic damage. At the beginning of the crisis, the pandemic caused a sharp decrease in the economy of Georgia and further aggravated the existing problems: exchange rate of GEL, inflation, investment, unemployment, and public debt. The largest decrease was recorded in the hotel and restaurants sector - 80%, followed by a 20% decrease in the transport and warehousing sectors. Entertainment and leisure sector services decreased by 15%.

In terms of the degree of restrictions, Georgia was ranked 15th out of 184 countries, which indicates rather strict restrictions, and which was reflected in the general macroeconomic balance. Due to lockdowns, the budget of Georgia lost 16 million GEL daily in 2020, with a total of one billion GEL. The economic decline in Georgia was 6.1% in 2020, however, according to experts, if the economy had not been shut down, the overall decline would probably have reached 8%. This, along with a sharp slowdown in economic growth, led to an increase in the budget deficit from 4% to 9%.

Georgia managed to undertake successful fiscal and economic policies. In the very beginning of the crisis, the country determined new priorities of its fiscal policy which allowed to stabilize the scale of the crisis and significantly reduced the degree of destruction. State programs of entrepreneurial support, transfers to domestic farms and social assistance for persons with limited liquid funds showed significant results. Thanks to this new policy Georgia managed to provide a large-scale fiscal support to households in the second phase of the crisis, by expanding the purchase of assets, increasing credit financing, and reducing the interest rate.

The pandemic crisis made significant changes in the budget of Georgia and required its substantial adjustment. Total expenses in 2021 It amounted to 25% of the GDP, 2 billion from the state budget for the anti-crisis program. GEL was allocated, which went to two priority directions, - financing of state social projects (grant of allowances, financing of population social protection projects, increase of teachers' salaries, indexation of pensions) and business support (430 million GEL).

In the strategy of state support of the economy, a special place was given to the rational spending of state funds and the issue of regulating the state debt. The new policy is derived from the basic requirements of the "EU Fiscal Rule" and aims to four outcomes: control the budget deficit, increase the efficiency of spending of funds, reduce the cyclicality of fiscal policy and prevent its unsustainability. The International Monetary Fund evaluated this strategy as particularly successful, namely because the state managed to keep the main internal resources necessary for macroeconomic balance, which led to unprecedented rates of economic recovery in the country already in 2021 (International Monetary Fund (2020).

Georgia also changed its priorities in terms of economic policy. The transit and tourism function were defined as the main priorities of the Georgian economy, with the aim to create prerequisites for a stable positioning in the world markets. In 2021, the growth of the Georgian economy amounted up to 10.6%, which was the best result in the region and the second-best result in Europe. IFM predicted to Georgia the highest economic growth in the region and in Europe (34.5%) for a medium-term period (2021-2025). In 2022, compared to the previous year, the volume of PUI doubled and reached an unprecedented level for Georgia - 1 billion 675 million USD which created additional resources for economic growth.

An important feature of the post-crisis rehabilitation of the economy is the openness of markets and the positioning of countries in international trade. The correct crisis management strategy of Georgia and the efficiency of post-crisis rehabilitation led to a significant revival of foreign economic activities and restoration of pre-pandemic foreign trade level. In November 2022, the export volume of Georgia increased by 14.1% compared to the previous month and amounted to 491.1 million US dollars. This significantly contributed to the stabilization of financial markets and to the strengthening of the local currency (the GEL strengthened by 13 points against the US dollar in November 2022, compared to the corresponding period of 2021. The level of public welfare has also increased. In the third quarter of 2022 the price of the hands of employees in the business sector increased by 145 USD and amounted to 610 USD. In November, compared to November of the previous year, the import increased by 20.8% and amounted to 1248.8 million US dollars, and the index of overlap of imports with exports increased by 39.3%. (Geostat, 2022).

According to the IMF's expert assessment, high rates of economic growth in the medium term will bring significant progress and world recognition to Georgia, in particular, by 2027. Indeed, the legal foundations of business management and the parameters of association with international legislation have been significantly improved. According to the World Justice Project, according to the index of freedom from corruption, Georgia ranks 30th in the world, which indicates a significantly improved environment in terms of business promotion and interest of foreign investors. IMF also predicts the increase in GDP per capita and with the optimistic forecast the country has the possibility to move to the group of rich countries (15,200 US dollars/per capita) by 2030 (IMF, 2020).

Effective monetary and credit, fiscal and financial policies have protected the world from a larger crisis. The transfer policy of the state quickly increased consumer spending, it was especially useful for entities with a deficit of liquid funds, credit guarantees, loan financing programs practically eliminated the risks of bankruptcy, by IMF 1990-2020 A study of the economies of 13 developed countries showed that the risk of bankruptcy of economic agents during the Covid-crisis has decreased compared to previous recessions, however, this may also be an objective result of the moratorium imposed by the government on accepting bankruptcy applications in some countries.

The World Bank suggested that the authorities maintain the support strategy until the pace of economic recovery accelerates and calculated the relationship between economicrenewal and the effect of anti-crisis reform, which made a significant change in the IMF's 2021 economic recovery forecast parameters. 

Discussion and Conclusion

Our research has revealed some interesting and novel findings. First, we observe new approaches to interstate cooperation, where unified standards of integration give way to individualism and deglobalized authenticity of countries. Because of this, stabilization programs need to be developed individually, considering the structure of the economy of each country and the type and severity of the crisis. The peculiarity of the global economy, against the background of the decentralization of the world unified management system, has become the activation of centralized management elements within countries. This is based on a new standard of world cooperation, in which the requirements of integration should be balanced with the need of developing national economies.

Another interesting result is a need for a close collaboration in parallel of increasing decentralization. Indeed, an effective management of crisis needs ensuring the compatibility of the anti-crisis policies of different countries, which gives a greater result in a complex environment. Cooperation is particularly effective in creating and harmonizing a common fiscal space. The development of a common policy between countries is very important for trade and technological relations, as well as cooperation in combating the negative consequences of climate change.

Third, and particularly for developing economies, our research has shown that the perspectives of cooperation with the European Union are especially important for the proper management of post-crisis processes. In the case of Georgia, this is primarily based on the "Deep and Comprehensive Free Trade Agreement - DCFTA". In addition, bilateral cooperation in economic and social development, energy security systems and the construction of state institutions are necessary. In Georgia, the issues of economic and social integration with the EU were initially reflected in the PCA and ENP agreements on partnership and cooperation. These programs aim to harmonize sustainable development and competition policies, which includes cooperation in the field of free trade, education, intellectual and industrial property, consumer rights, food safety, poverty reduction and provides deepening of relations in issues of social equality. Today, Georgia is involved in the "Eastern Partnership Program", which provides for the establishment of a high level of democracy, the activity of civil society, cooperation in security, migration, and border management issues.

As a result of our research, the following theoretical and practical contributions were highlighted. First, economic rehabilitation programs in the post-pandemic period should be focused on the final elimination of the problems that arise during the crisis, and not on their temporary dissimulation. This should be done by identifying priority directions and concentrating on them.

The second contribution is the development of a framework for managing transformational processes in the post-crisis period. The framework proposes the following six forecasts:

1. It is possible that the pre-crisis negative factors of economic development may be strengthened (increasing inequality, increase in public debt, aggravation of poverty, weakening of human capital).
2. Due to the shortage in natural resources, the resource dependence of countries and the dominance of energy providers in the world economic and political processes will increase.
3. Cooperation between countries in matters of foreign trade, mutual exchange of technological resources, reduction of the negative consequences of climate change will enter a new phase and gain significantly more weight.
4. In the format of interstate relations, priority will be given to financial relations between countries, especially the issue of creating a single fiscal space as an innovation of integration processes will be activated.
5. The structural transformations of the economy should be considered in countries’ development programs, and it should reflect the modern growing scale of the introduction of production growth, nanotechnologies, digital economy, and green infrastructure.
6. The third contribution of this work is especially important for developing economies. Studying the example of Georgia showed that for developing economies, the crisis period can be used as a lever for a strategic change. As a result of the carried-out reforms and investments, Georgia used the opportunity to become a safe and attractive country for foreign investment, to successfully play the role of a regional leader and to implement liberal administration of the economy, which is one of the important prerequisites for European integration. Changing from a transport corridor to a logistics hub of the region, requires changes in two directions. First, the post-crisis rehabilitation strategy requires the promotion of the development of the business sector and a wide use of financial mechanisms (in a form of state support). High rates of growth and its structural transformation policy put new demands on the mechanisms of economic regulation. This involves the stabilization of financial markets and ensuring the free movement of capital. Coordinating goals and harmonizing national monetary strategies should become the basic principle of the operation of countries' monetary strategies in the global environment. Georgia's involvement in the "Eastern Partnership Program" is based on new approaches to cooperation, definition of unified crisis management standards, coordination of states' anti-crisis currency strategies and development of complex mechanisms. Second, in terms of legislation, states should accelerate the type of reforms that specifically encourage the growth of domestic economic activity. Here, together with the executive authorities, the parliament has an important function, where different types of strategic and detailed action plans should be initiated. Land reform, necessary legislative changes in tourism and energy, production and other sectors should be accelerated. 

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