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Economic Development – A Key Factor of Economic Growth and Increased Public Well-being

Both in scientific literature and in practice, “Economic development” is frequently confused with the term “economic growth”. This is due to the fact that past changes in economic development took place so slowly that they were barely detectable, thus more emphasis was placed on growth. This attitude was common abroad.  Then when former communist countries entered a stage of post-communist development, little attention had been given to the study of the specificity of their economic development problems.

Professor Ramaz Abesadze has studied the issues of development and presented results at international conferences in Poland, Lithuania, Russia as well as in Georgia (Poland, Lubelskie (2013, 2012, 2011, 2009), Wlotslavek (2010); Lithuania, Vilnius (2008); Russia (2009); Georgia, Tbilisi (2012, 2011, 2010); Results were published in international magazines (“The Caucasus Globalization”, Volume 3, Issue 4, 2011; “Society and Economics”, №7. 2011, “The Caucasus Globalization”, Volume 3, Issue 4, 2009; “Central Asia and the Caucasus” No 6(60), 2009) and foreign scientific collections (Modern Tendencies of Management (papers of science), Vilnius, Kaunas, ISBN  978-9955-423-69-0, 2008).  A textbook was published, based on this research, entitled Economic Development and authored by Professor Abesadze, supported by the Department of Macroeconomics.  Curricula on Economic Development and Economic Development Theory were introduced within the Department of Economics of the Faculty of Economics and Business. Most textbooks (for example, Michael P. Todaro’s classic Economic Development) mostly focus on countries with economies in transition.  Professor Abesadze believes, however, that economic development takes place in every economic system, not only in developing countries. However, the goals and tasks of economic development in developing countries differ.

The research first defines terms and shows the relationship between economic development and economic growth. Economic development means “perfection” in economics, a transition to a new quality, while economic growth refers to the quantitative increase of economic scales.  Processes of development happen within a specific context, or economic system, as a result of change in key components: types of property, physical and human capital, technology, information, institutions, etc and the interrelations between these components. If changes between components of the economic system concur, there is a synergistic effect that can strengthen the economic development process. When there is resistance between these components it becomes urgent to make changes that accelerate economic development, which create new forces that strengthen the economic development process. As international experience shows, synergistic effects can be achieved when private property plays a dominant role in economics and when there is economic freedom, competition, healthy finances, balanced budget, optimal tax value, etc. The state plays a key role in regulating these processes. State policy should ensure the establishment of these economic conditions and eradicate all forms of nepotism, paternalism, state interference and corruption.

There is a strong connection between economic development and economic growth. The very fact that a quantitative change finally moves to a qualitative change proves that economic growth is one of the essential factors of development. In turn, economic development creates conditions not only for qualitative perfection in economics, but also for its further quantitative growth. However, in the short term, economic growth might take place without economic development.  This can happen, for example, when there is extensive growth of production factors, as illustrated by the development of pre-industrialization economic systems. Special emphasis should be placed on traditional economies, where increase of scales over millennia happened practically without economic development.

Economic development is also possible without growth, even under conditions of economic backwardness--the process of economic transformation, or qualitative perfection in economics, in most post-communist countries are good examples. As paradoxical as it sounds, economic development can even be directed to slowing down the rate of economic growth.  This happens at the expense of material and energy capacity, the quality of goods, and other qualitative changes resulting from the use of modern technologies, and by increasing public welfare and national defense.  In future this process will be strengthened on the basis of creating new technologies. However, in the future there is an unprecedented acceleration of economic growth as a result of this type of economic development. Economic development processes determine the rates of growth and increased public welfare over the long-term.

This study created a system of economic development indicators. The quantitative measurement of economic development is extremely difficult as qualitative changes are hard to express quantitatively. No single indicator alone reflects economic development. Professor Abesadze has identified indicators to express the economic, social and qualitative changes of economic development.

The research discusses a number of factors of economic development, such as: natural-resource potential, physical capital, entrepreneurship, science, technology and technological knowledge, high technologies, invention, innovation, education, structural changes, unemployment, poverty, sustainable development, population figures and standard of living, energy, foreign economic relations, globalization, ecology, corruption, freedom, equality, democracy.

A few of these are discussed here. For example the study refers to “high technologies” as representing modern and progressive technologies that currently accelerate the process of social, and especially economic, development. Simultaneously, the author believes that the epoch of informatization is ending in developed countries and an epoch of a “thinking technosphere” has begun. At the current stage,   a key role is played by information-telecommunication technologies.  A thinking technosphere will provide greater opportunities than a single intellectual or “thinking machine”, because it will be the smooth unity of such machines situated around a common artificial “mind”. Under such conditions, there will be significant changes to people’s situations, as they will have to deal with artificial intellectual machines in their everyday lives.  These will be able to discuss certain issues and even to make certain decisions in various situations. The forms of enterprise, organization and state management will undergo root changes.

The researcher characterizes the key elements of human capital such as physical and spiritual health; mental and physical abilities; skills (professional and institutional); experience (professional and vital);  knowledge (professional and general); and motivation.  He also focuses on unemployment. Unemployment—especially long-term unemployment--impacts economic development by reducing the value of public, national and human capital.  It reduces incomes and respectively investments, including investments in innovation. Financing for scientific research projects is reduced from both the state and private sectors, and inequality in incomes increases, which leads to the loss of resources, and increased political, social, psychological and legal tensions.  Instead of implementing policies that provoke inflationary processes, the state should stimulate processes to eradicate unemployment.  This leads to increased production by expanding the old economic processes and utilizing new economic spheres. It could be termed “innovation-oriented economic regulation”.

Unemployment should be re-defined. For example, according to the existing definition of “unemployed”, a key element is personal decision and whether someone wants to work or not. Current economic interests deem it necessary to list millions of capable jobless people as unemployed citizens, leaving them in the shadows when defining a most precious resource – labor. This definition artificially reduces the quantity of unemployed citizens and the efficiency of state policy on unemployment. Although according to legislation a person has the freedom to work or not, it doesn’t mean people who are fit to work are not harming society if they don’t work. The author believes that regardless of whether a person wants to work or not, we should differentiate those who are active job-seekers from those who are voluntarily jobless. The term “labor force” is also ambiguous in economic literature, and rarely used in practice; this leads some to assume it is a special commodity, while others think that it is part of society, or refers to those who seek jobs, i.e. the economically active population. It is not correct to describe the labor force (the unity of physical and mental skills of an individual) as a commodity, because a commodity is a product with a physical form, which is produced for sale and which changes owner after being sold.

However, in the production process, the skills of a person are hired, not sold; so, the person remains the owner of his own skills and moreover, these skills even increase in most cases. In order to sell the skills, the owner of these skills should be sold too. Such relations were observed in the Age of Slavery. Under modern conditions, naturally, it is unacceptable even to imagine any such relations. Thus, a worker does not sell his skills, but uses them in the process of production when hired by an owner, while the latter pays him a relevant remuneration for it. Since modern economic literature provides a term to describe human skills – “human capital”-- it is more justifiableto use “labor force” only with the second definition, i.e. the number of employed and unemployed citizens.

In literature, the “normal” rate of unemployment is identified as structural unemployment and frictional unemployment. In the author’s opinion, a normal rate appears with non-intervention, and even when it is regulated by the state, it is impossible to achieve a lower rate of unemployment. Although, “normal” unemployment is structural and frictional, frequently these rates do not coincide with the “normal rate of unemployment” (i.e. the lowest possible rate of unemployment). There are many examples of how technological innovations triggered unemployment, yet innovations also reduce the rate of unemployment, even under conditions of significant growth of the population, by increasing the marginal products of labor. Innovation should be accompanied by the expansion of production that can be achieved through innovations that result from expanding old spheres of production and utilizing new ones.

At the current stage, poverty has become a criteria of economic development. If the poor stratum of the population fails to enjoy the fruits of economic development and the gap between rich and poor increases, we can say that there is no economic development even though progressive changes might be taking place in some sectors of the economic system. Thus, the problem of distribution of wealth becomes a major criterion for economic development. While researching the aspects of economic growth, Simon Kuznets concluded that initially economic growth takes place while income is unequally distributed, but that at a certain point incomes start leveling. The author supposes that alt hough such a phenomenon is actually observable in developing countries, it is not in the interest of economic development. On the contrary, a reduction of unequal incomes (the Gini coefficient) actually promotes economic growth. The diagram below shows that the reduction of the Gini coefficient to the optimal K0  level promotes economic growth, then--as a result of reduced economic incentives—economic  reduction. Thus, the optimal distribution of incomes is one of the major factors of economic development and economic growth. The study provides more detailed analyses of the reasons.Globalization provides unprecedented opportunities for the development of human society, but also threatens its existence. It is crucial to direct the process of globalization correctly, i.e. to carry out “fair globalization”. Leading countries should contribute to this process as the issues often depend on their decisions. It is a hugely competitive process but simultaneously there is opportunity for enormous mutual assistance between the world market players and the states. Globalization shouldn’t be rejected outright, but each country should be assured of possibilities to access scientific development, the creation of high technologies, cultural improvement, intellectual growth and so on. Although some functions of the state are sacrificed to globalization, a country would acquire more international visibility and impact, which should be directed to neutralizing the negative impacts of globalization.  This includes the effective use of aid, raising competitiveness, maintaining and developing the best national and cultural traditions. Otherwise, the country faces the threat of economic collapse followed by a loss of education, culture, traditions, etc.

Globalization can permit countries to use the wealth of other countries. National identity (language, traditions, religion, territory, etc.) should be preserved.  Launching wars to capture foreign territories would have no place, and economic inequality between the countries would decrease gradually. Fair global interests should stand above national interests. Through a uniform economic space, new traditions will emerge and some national traditions may disappear, yet it is essential to maintain fundamental national values, precious for every country. This can be achieved when violence is ruled out and all the decisions will be adopted on the basis of a consensus. Other directions for globalization may result in disaster.

Research also addresses the economic development of Georgia. Professor Abesadze focuses on the stages of post-communist transformation in Georgia: economic collapse; stabilization and launch of economic growth; accelerated economic growth; slowed rates of economic growth and aggravation of social conditions; acquiring the function of a transit country; improvement of social conditions and acceleration of economic growth rates; strengthening of the function of a transit country; slowing down the rates of economic growth and economic collapse; and overcoming economic backwardness and restoring a tendency towards growth.  He studies the reasons for the successes and failures that have taken place while implementing reforms, and offers recommendations.