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Journal number 3 ∘ Ramaz Abesadze
Problems of economic development and economic growth in Georgia


In thiswork is proposed some considerations about further development of Georgian economy. The focus ismade  on the innovative way of economic development  as well as on existent  acute problems of the modern stage such as are: unemployment and poverty, sustainable development, problems of energy sector, the exchange rate of national currency, a negative trade balance and so on.


More than a quarter of century ago in Georgia's economic had begun the process of transformation, but creation of a completed market economy has failed, because there were not only the objective conditions, but also the common mistakes had been done, namely: on the initial stage of transformation, by  statewas provided the wrong domestic and foreign policy, the economic reforms were incomplete and non-systematic; it was chosen the wrong path of reforms. The path of innovative development of  economy had been completely neglected; incorrect monetary-credit policy  was following after  introduction of  transitional currency- coupon; less attention was given on development  of small business; during the years were neglecting problems of countryside areas; were endeavored the principles of inviolability of private property (which is the corner-stone of market economy); ineffective measures to combat criminal elements during the decades; misinterpretation and wrong  implementation of the liberal policies; ineffective usage of significant international aids; the serious  mistakes made during the process of privatization, and etc.

It should be particularly noted that for nowadays the market infrastructure (commodities, stock and labor markets, insurance services, investment institutions, marketing, engineering, consulting and information services, etc.) is underdeveloped as so as is a rather unprogressive  the economic path  (industrial and agrarian sectors). It’s on a low level development of small business, export exceeded import on several times and so on)  as well as the social structure of country is a weak (still is not formed a strong middle class, is quite high unemployment rate and poverty levels and so on) [ Abesadze R., 2016].

Economic development and economic growth

At first, it should be noted that the terms ‘economic development’ and ‘economic growth’ are treated as a process in economics and not as economic disciplines like they arestudying . In spite of that, these categoriesare differ from each other  in economic literature (beginning by Joseph Schumpeter), at least, in practice (and often also into scientific works) they, both, use in the same sense - if economic growth occurs, it is considered that  economic development also growths.  And vice versa, if economy downturns it means thatto talk about economic development is nonsense, which is incorrect, because economic growth means an enlargement of quantification of economy scale, and economic development is shifting to its qualitatively new, more perfect state. For example, the increasing number of mobile phones and usage of new technological generations of them expresses the economic development. Despite of the significant differences, there is a great interrelationship between these two processes - economic development creates not only qualitative improvement of economics, but also its quantitative growth indefinitely. Economic growth createsnot only the qualitative robustness,but also it enlarges indefinite factors of economic development. The economic growth is one of the main factors of economic development, but it is possible that they exist without each other, separately. The good examples of it are the economic systems that existed in pre-industrialization period like a traditional  economic system and the post-communism transformation.In the first case,the enlargement of landscape and/or economic development during the thousands of years had been realized almostwithout any qualitative changes in economic development. In the second one, in majority of the post-communist countries, not only in the period of economic growth, but even during the economic recession had been happened a real economic development, because their current economic system was changing to a more progressive (market economy), the new institutions were entering in their reality like the physical and human capital, technologies, and etc.

Historically, in the process of growing up thewell-being of mankind, the economic growth played a crucial role, but after beginning of significant changes in economy, the role of economic growth diminished and the role of economic development increased, especially in the modern stage. It is possible to formulate the following regularity: the increasing of well-being of humans is increasingly dependent on economic development that is more based on the progressive changes in economy rather than on economic growth. During the low level of economic growth, and even on zero level of it, it is possible to growing the comfort and profitability of society. At the modern stage, economic development replaces the importance of economic growth. The following regularity has been established: the products of the same value (GDP,MAP) can bring more prosperityin  this year than in previous ones. All these issues are due on increasing improvement of quality of existing products, the removal of obsolete production and technologies and introducing of new, previously unknown, types of them. There is also another important pattern of economic development: the concomitant process of economic development is economic decline. Originally, it is expressed primarily in the elimination of obsolete equipment and consumer products (outdated wood-working, stone and metal tools, equipment, and etc.), this is absolutely normal for  modern stage: competition that forces entrepreneurs to increase productivity and reduce the prices; in the process of producing production as well as the physical characteristics of  them are changed, the mass of the manufactured product becomes "lighter" (for example, changing of metal details to plastics, and etc.); there is also a quantitative decrease in production line of some kinds (for example, combining a copier, a scanner and a printer into one tool, and many other); the limitation of resource availability has been requiring the rational usage of non-renewable natural resources, in order to sustain them as long as possible ( reducing of capital, materials, energy efficiency, etc.); sustainable economic development, interconnection between  nature and society requires that economic growth being actively online with processes of re-production in nature; the Earth's over-population and the empowerment of women, by resulting is a decline in birth rates and consequently a decrease in population growth rates, and etc. All these processes lead to economic decline which in turn is aimed at reducing economic growth rates. In particular, computer usage in economy leads to a significant reducing of resources per unit of production. Of course, economic downturn does not mean that economic growth will be eventually stopped. Economic development gives rise to the new opportunities for economic growth. In future, relationship between these two processes of economic development will be depended on the emergence of new opportunities in nature and their technology usage.Economic development, in the final report, should lead to increase public welfare  which is reflected not only in income per capita growth, but also in the gradual equalization of income among population that really has been increasing the comfort of mankind.

Main direction of economic development of Georgia

Therefore, at the modern stage,increasing the well-being of people is more conducive to economic development than on economic growth. However, the economic growth also plays an important role, especially in the developing countries. Although, it is noted some positive regularities: in the developing countries, it will be necessary less time for reaching the well-being that nowadays exists  in the developed countries, because they can use for free the production, technics and technologies which are created in developed world and a lot of efforts and time were spent for that process. The main issue is that the concrete country should use these possibilities and orient the own  route to economic development. The practice shows that countries which have positive results in the process of making qualitative changes and countries that could create the innovative economies are succeeded, and those that have failed in that case have nowadays a low living standards. It’s a pity fact that Georgia is among them.

Eradication of deficiencies in Georgian economy and failure to follow the right path can’t only being achieved through inertia. As the experience of developed and advanced post-communist countries shows, after the restoration of independence, the main focus should be made on the qualitative improvement of economy that is based on the construction of innovative economy, but even nowadays, the situation here is very unenviable. Namely: the scientific potential of country is in a deplorable condition: despite of some growing, the salary of scientists is on a low level, due to which the number of scientists has decreased and all scientific fields have becomenot prestigious; is rather underdeveloped the system of granting, there is too poor conditions of the material bases of science,and etc; The serious transformation is required in a system of secondary, higher, vocational training and continuing education; the system for transferring scientific research services and the results of research is ratherunderdeveloped; there are no any mechanisms to facilitate the diffusion of technologies; the level of SME development is in a low level. There is no infrastructure that is supporting the small  and innovative enterprises; there is no relevant comprehensive legislative framework and incentive system for innovation development, finance, taxation and other mechanisms; regional innovation activities are particularly neglected; donors are not supported in the process of further implementation of realized projects, that leading to zero their future activities; there is  no a real connection between science, business and the statewhich is a key requirement of innovative economy; the governmental and business orders for scientific research is on a very low level; almost don’t exist  innovations that are based on their own research and implementation;the comparative innovations are only implemented into communication and information technologies sectors; there are many other factors deterring the introduction of new technologies – the lack of knowledge and political will as so as we have not seen the  institutional support, scarcity of financial resources; there are  political and social tensions, and much more.

The economy of our country can mainly be described as non-innovative. The country does not have a clear innovation policy - an appropriate strategy and mechanisms of state regulation.

The progress of community is inextricably linked to innovation. It has made unprecedented progress in all areas of human activities and living circumstances. It can be said that the process of economic development is the process of innovation in all elements of the economic system. Innovative economics is based on knowledge, innovation flows, technologies, information, institutions, human capital, manufactures, products, and etc. The process of development perfection should be focused on the intellectual work of scientists and innovators and not only just onto capital bases.

What is needed for real formation of innovative economy? At the first of all, it is necessary to elaborate the “Strategy for Innovative Development of Georgian Economy”, and on this basis should be preparedthe “Plan for Innovative Development of the Georgian Economy”.

The strategy should define the country's innovation policy and development directions of the innovation system. These directions are: 1. Enhancing the scientific potential. 2. Improvement of educational system. 3. Establish a close and permanent linking relationship between science, business and government. 4. Improvement of scientific research services system. 5. The formation of a knowledge economy. 6. Development of innovative infrastructure (universities, research institutes; techno-parks; business incubators; clusters, small innovation enterprises, innovative technology centers; consulting firms; telecommunications networks; financial instruments, including venture capital, and etc.). 7. Revitalization and development of regional innovation activities. 8. Creating an environmental  conductivityto innovation (benefits, tax benefits, risk insurance, etc.) 9. Creating the support mechanisms for implementing donor project outcomes. 10. Formation of a system for better usage of foreign credits and aid. 11. Creation of supportive mechanisms for development competitive entrepreneurship. 12. Maximizing   usage of high-tech capabilities and other issues that will be dentified during the strategy work.

The country's innovation system must be able to generate and/or import innovations. Firstly, priority should be given to importing innovations and then to conducting research based on their own research, otherwise, the competitiveness of our country always will be on a low level, because it is a leading point of a negative trade balance and has been endangering the national currency.

The Innovation Development Plan of Georgia should be prepared in accordance with concrete periods, outlining the main priorities, implementers and instruments for innovation development on each its stage.It should be noted that such strategies and programs have been developed by almost all the post-Soviet countries.

The strategy should not be prepared and developed by one or more individuals, but should be involved the full potential of the country: central and local governmental bodies, universities, research institutes, business representatives. Development should be guided by the national government, otherwise, the strategy cannot justify its purpose.

Naturally, the strategy should be based on firm adherence to market principles, further refinement of the market mechanism, and reflect the modern processesof the world economy, above all, it should be based on sustainable development, a "green" and "circular" economies.

It is positive issue that the current government recognizes the needs for building an innovative economy and is taking some steps in this direction, for example: has been adopting a law on innovation; the Ministry of Economics and Sustainable Development of Georgia has established the Agency for Innovation and Technology, the Research and Innovation Council. Georgia is the first country in south Caucasus where fab-labs are operated; the first technology park was also opened, and etc. However, all these steps are relatively fragmented, and the country's economy can mostly be described as a non-innovative economy. There is no explicating innovation policy in our country - an appropriate strategy and mechanism of state regulation.

It is a very important issue that Georgia's government has made a decision to increase funding for education (including science, of course !) is crucial, but any increase in the funding will not work smoothly. It should be implemented according to the priorities outlined in the Strategy and Plan. Many developing countries have had a bitter experience of wasting billions on education which only has increased the number of diplomas, but that has not affected their economy, as funding for the educational sector has grown without considering the state of  economy and its development prospects. It should also be mentioned and always being in mind, that science is not a field of education, it is an independent issue – the basis of progressthat is based on it. It is true that education increases professional community and the human capital of country, but it does not create a new knowledge.  It’s created only by scientific research and practice. The discoveries are made in science, the results of which are used in any fields of our life, including education, and which have led to the unprecedented progress of the whole society. Therefore science should be given a real priority, otherwise, the process of economic development will be without basis and the results will not be positive.

Also is important to build in Kutaisi the international technological institute that will be focused onto finding the answers of modern demands of science, technologies and educational system, but the higher educational institutions like this that should be there are working successfully only during the innovative economy. If the local economy is not in the high level in that term the specialists will be grown for other countries, and the scientific achievements that will be created there will be used by other states, and etc.

If formation of innovative economy will be have the fragmental character and not complex in that case the success won’t be reached.

There are many examples of above mentioned arguments and they can be cited. For example, Japan, that began to build an innovative economy at the end of World War II, it was characterized by the active scientific, educational, and technical policies. However, initially the country's innovation system was based on overseas scientific and technical advances, a massive influx of technologies (licensing, joint ventures, participation in international research projects, etc.). At the same time, the active development of its own scientific research was gradually reducing the usage of foreign scientific technical advances. Since 1960s, the large-scale of scientific-technical projects had been launched with participation of state, business and research institutes. In 1977, a software document was adopted - "For a Longer Perspective on Complex Scientific and Technical Fundamentals", which envisaged: the strengthening relations between government, scientific and business circles, and funding for scientific and technical activities; training of scientific staff and stimulation of fundamental science; development of science and technology in the concrete places; enhancing international scientific activities and more. Since 1980s, the course has been focused on maximizing self-sufficiency in scientific and technical activities and innovation that became the basis of economic strength for its own scientific and technical potential, and in which Japan has successfully revamped. Nowadays all  scientific and technical projects adopted in Japan have outlined the following approaches: science, technic  and technology are the basis not only of their economy, but also for development of mankind; ensuring harmony between science, business, the state and society; support of all people who have been working in science and technology sectors; to minimize the brain drain; increasing funding for scientific and technical projects; development of scientific-research infrastructure; stimulating the original thinking and creativity of scientists; intensification of international scientific and technical activities; to support scientific and technical development of the peripheral regions of country; activation of interconnections with companies, universities and research institutions; increasing, both, the scientific and technical potential and innovative potential [Avdokushin, 2017].
Nowadays, Japan is one of the leading countries in terms of development scientific-technical and innovation potential and humanization of economy. These processes have taken place in all developed countries and also in developing countries like China which builds an innovative economy.

Other existent acute problems of Georgian economy

The problem of poverty and unemployment. The experience of developed countries shows that the fastest way to solve these problems is to develop a small and medium-sized businesses that is impossible without the state support. Of course, the big business, itself, plays a great role in solving these problems, but it requires much more capital investment and its scope is relatively small. You can't build a large enterprise in every village. Also, the level of automation in the large enterprises is gradually increasing , but  the number of employees per capita is decreasing, which is why the number of SMEs in developed countries already exceeds the number of large business employees, with more than half of the output produced.

The SME development assists: employment;  establishing a Medium layer and thereby establishing social equality; identifying the entrepreneurial skills of  country and increasing the entrepreneurial potential; fixing the population; compared to large enterprises due to the large scale of its territory. The small enterprises can be established anywhere else, but not the large ones; economic stabilization and  economic development through small innovative enterprises; economic growth.

Its weaknesses towards market forces (resource and financial weakness, difficulty in making investments, etc.) necessitate the existence of effective mechanisms of state support . Many scholars and public figures nowadays agree on the need of the state’s support for development the small business. Differences of opinion among the scholars are caused only by the forms and scales of state support for small business.

Practically, in every developed country, the peculiarities of state regulation of small enterprises are reflected in specific legislative acts: The Small Business Act (US); "The Basic Law on Small and Medium Enterprises" (Japan); The Cartel Rights (Germany), etc. In the case of small business, the basic principles of state policy in the market economy countries are very close to each other. For example, the most important factor for a small business in the United States is the creation of a support network that includes: financial, material-technical, information and consulting support. There are the principles of state support for small and medium-sized businesses were still in place during the Great Depression and World War II. The federal programs related to SME development dated in 1932. In that time the small businesses had been the main creators of the jobs. The Law on Small Business was adopted in 1942, and in 1953, a state Agency - The US Small Business Administration, which still exists and protects the interests of small businesses. Its activities are funded by the federal government, with branches throughout the country. It comprises by congressional committees and numerous special bodies in ministries, agencies, and local authorities. Its main functions are: assisting the business in obtaining credit and providing collateral support; information and technical support; the SME lending and subsidizing from its own budget [ The state ..., 2012] ; operating not only the single programs; assisting in obtaining government licenses, for which it provides relevant certificates (this is a peculiar document showing the rights of small businesses to execute state orders); free consultations and seminars; usage of library, computers, internet, various reference books; business incubators and assistance in the Women's Business Center; assistance in the sale of products; stimulating the innovative activity of small businesses; venture financing, etc. [Abesadze R., 2008]. In addition to these services, in the United States there are numerous other state programsfor  supporting SMEs as well as various tax concessions.
In order to increase employment, it is necessary to have a State Employment Service. Currently, the labor market in Georgia is extremely disastrous: there is no relevant infrastructure related to its functioning. Under such conditions, it is impossible to establish even the real picture of unemployment.

Energy problem.At first of all, the main focus should be made on the country's rich hydro and non-traditional energy resources, but under no any circumstances we must not refuse to build the large hydropower plants. When dealing with these issues, we will have to make some ecological concessions, of course. It should be keep in mind that the economy is booming and global energy supplies are gradually expiring. Of course, the painful demands of preserving national values must also be taken into account. Georgia has good conditions for acquiring the wind and solar energy as well as geothermal energy. In the future, the Black Sea energy resources can be also used. Where, along with chemical and hydrological resources, some other energy resources are represented in the form of seawater fuels - sulfur, hydrogen, methane and propane. Very interesting is the synergistic concept of energy development which calls for the combined usage of energy to achieve more energy efficiency than if they were used separately. There are large reserves in Georgia in the field of energy efficiency.

The problem of sustainable development. The problem of developing a "green" and "circular" economy (especially the problem of depletion of resources and the maintenance of renewables) has the paramount importance in the whole world as well as to Georgia. It requires completely new approaches, fundamental changes in every element of the economic system. This would not be possible without creation of own innovation system, because all countries are unique in own features.

There is also the problem of the currency turtle which is in need of innovative development of economy, because if the country's competitiveness is not increased, its trade balance will remain negative and the danger of devaluation of the national currency will always exist. It is often argued that the strength of the national currency depends solely on the National Bank and/or the Government alone, but it is a wrong point. The strength of the national currency depends  both, on the National Bank and the governmental monetary policy. By conducting the right monetary policy by the National Bank, and by attracting of foreign investment by government which is promoting export growth and that is related to the formation and development of innovative economy.

One of the most important unsolved problem remains the problem of development the rural economy. Nowadays Georgia has a largely naturally based, low-tech, and therefore low-productive,underdeveloped countryside areas. Due to the extremely difficult conditions, the rural people cannot overcome all current difficulties for increasing  thequantity of  agricultural products. Thus, effective state aid to the countryside has a very essential meaning. However, this should not only weaken the farmer's own incentives, but also should strengthen themto be more active and creative. Naturally, the main focus should be on helping the farmer increase the quantity of products and implementation of new innovative technologies to transform them into modern commodity farms as soon as it will be possible. The local business interest (guarantees, preferential credits, preferential tax terms, etc.) is a must. The state companies can buy farms and making investments on this way. [AbesadzeR.,2016].

The development of industry is the basis for the development of all other sectors. In the future perspective, the orientation should be given to the development of predominantly science-intensive fields of industry.


1. More than a quarter of a century ago Georgia's economic transformation had begun, but a perfect market economy  failed, subjective mistakes have been made along with objective circumstances.

2. At the modern stage, human well-being is increasingly dependent on economic development  that stimulate progressive changes in economy rather than economic growth, at low or even zero rates of economic growth, and even at the expense of public convenience and usefulness.

3. Products of the same value (GDP, MAP) can bring more prosperity in this year than it made in the previous years.

4. The concomitant process of economic development along with economic growth is the economic decline.

5. Developing countries need less time (and less economic growth) to reach the level of prosperity like have developed world, because they can use free the products, technics and technologies which the developed countries have nowadays and they spent a lot of time and efforts for reach it. There is a key opportunity for developing countries to reach that path.

6. Eradication of deficiencies in Georgian economy and failure to follow the right path can’t only be achieved through inertia. As the experience of developed and advanced post-communist countries shows, after the restoration of independence, the main focus should be made on the qualitative improvement of  economy that is very important for construction an innovative economy.

But even today, here  situation is in a very poor path. 

7. The economy of our country can mostly be characterized as a non-innovative one. There is no an innovation policy in the country – and we have no an appropriate strategy and mechanisms of state regulation.

8. For formation innovative economy in Georgia, it is necessary:

1. To elaborate  the "Strategy for Innovative Development of  Georgian Economy" and on this basis should be prepared  the "Plan for Innovative Development of Georgian Economy". The main directions of that strategy should be: 1. Enhancing the scientific potential; 2. Improvement of educational system; 3. Establishing a close and permanent link between science, business and government 4. Improving the scientific- research service system 5. Formation of  economythat will be based on knowledge . 6.Innovative infrastructure (universities; research institutes; techno-parks; business incubators; clusters; small innovative enterprises, innovative technology centers; innovative firms; telecommunication networks; financial instruments, including venture capital, and etc.) should be developed; 7. Revitalization and development of regional innovation activities; 8. Create an environment conducive to innovation (benefits, tax rates, risk insurance, and etc.); 9. Creation of support mechanisms for implementation of results in the projects that are realized  by support of  donors; 10. Formation of  system for better usageof foreign credits and aid; 11. Creating mechanisms to support the development of competitive entrepreneurship; 12. Maximumof the usage of hi-tech capabilities, and etc.

Our country's innovation system must be able to generate from import of innovations. At first, priority should be given to importing innovations and then implementing innovation based on their own research. Also should be given a priority to science, otherwise, the process of economic development will be without any positive results and goals will not be achieved.     

10. It is positive point that the current government recognizes the need to construct an innovative economy and really are taking some steps in this direction. But if formation of  innovative economy will be only fragmented and not complex, success would not be achieved.

11. Experience in developed countries shows that the fastest way to solve this problem is to develop a small and medium-sized business that is impossible without the state support. There is also a need for founding the State Employment Service Agency forincreasing an employment. 

12. When tackling the energy problem, the primary focus should be made on better using the country's rich hydro-power and non-traditional, alternative energy resources.

13.The problem of sustainable development,  should be made a focus on creation of a "green" and a "circular" economy (especially the problem of depletion of non-renewable resources and the maintenance of renewable ones) has a paramount importance to the whole world as well in Georgia. It requires completely new approaches, economics. It would not be possible without formation the own innovation system, because each country is unique.

14. There is also a serious problem the currency turtle which reduces the innovative development of country’s economy, because ifcountry's competitiveness is not increasedand  its trade balance will remain negative and it always will be a danger of devaluation of  national currency.

15. Effective state aid to the countryside is also an essential point. However, this should not only stimulate the farmer's incentives, but also strengthen their actions. Naturally, the main focus should be made on helping  farmers to increase production  line and introduce them with new technologies that will transforming into a modern commodity as soon as possible.  The local business interest (guarantees, preferential credits, preferential tax terms, and etc.) is a must.  The state companies can buy the farms and invest in their development.

16. The development of modern industry is the basis for development of all other sectors of economy. In the future, orientation should be given to the development of predominantly science-intensive industries.


1. Abesadze R., Kakulia E. - The Mechanism of Regulation Macroeconomic for Small Businesses in Georgia. TbilisiPublished by PaataGugushvili Institute of Economics.
2. Abesadze R. 2014. Economic Development and Economic Regression. Tbilisi, TSU. Published byPaataGugushvili Institute of Economics.
3. Abesadze R. 2016. The Stages of the Transformation of Georgian Economy and General Directions of Development. ‘Economisti’ No.
4. Avdokushin E. 1. 2017. National Innovation System of Japan. Encyclopedia.
5. The State Support Of Small and Medium-sized Business In Developed Countries. 2012.
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