The FINANCIAL– Georgian experts predict the end of the world economical crisis by the end of 2009 and the beginning of 2010. Before stabilization finally arrives they discuss the lessons of the crisis which companies have received during the recession.
“The example of bankrupted and ineffective companies will be a good illustration for others. Another question is what each of us learnt from the crisis. We learned to act more carefully before making a decision and to take less risky steps. It will be a good example but unfortunately a lot of people saw big losses during this tutorial,” Akaki Kheladze, Head of the Management Department at CSB, Caucasus University (CU), told The FINANCIAL.
Kheladze supposes that another flow of crises should not be expected in the short term as the traces of the current one were hard. “Even in the case of a good decision we must analyze what was right and what was wrong in this case. It was a turn from theory to practice. The harder the result of the crisis the longer it will last for us. Current stabilization of political and economical crises may make us think that another stream of crisis won’t be expected in the near future.”
For Archil Jacobashvili, Associated Professor, Georgian-American University (GAU), the economical crisis taught us four main lessons. “The First Lesson: in the post-industrial age even capital markets have primacy against other macro markets, and with the current crisis the world economy is facing such constellation for the second time since the technological bubbles from 2001.
“The Second Lesson: globalization is the present and national economies are in need of international solutions. Could we imagine the destiny of several European countries (Belgium, Italy, Finland etc.) without the common currency and single markets in Europe?”
“The Third Lesson: the state could enter as a market participant, especially as the supplier of the bailouts and rescue plans, or as the producer of several public goods, but the freedom of markets is essential for our welfare in the long run.”
“The Fourth Lesson: whatever occurs, emerging countries should not become pessimistic. They can further fore reckon with the capital flows preconditioned that the functioning capital markets, monetary stability and property protection might be done and ensured.”
In Badri Gelitashvili’s words, lecturer of economics at Tbilisi free university, ESM Tbilisi, the main advantage of the company is managing risk management during stabilization and not crisis. “Exaggerated investments in the construction business caused crisis in this sector. Actually people must become more careful and think about expected risks during a country’s flourishing and not time of crisis. I would advise companies to hire specialists to research the market and make conclusions about risk management. The hugest mistake of a company is counting their profit based on only intuition.”
“The end of the crisis may be expected by the end of 2009 or at least by the beginning of 2010. The end of the world economical crisis will soon show us the end of the Georgian crisis. All this time will be enough for world cataclysms. Like it is solving the problem of the Russian crisis, oil, gas problems, U.S. President’s inauguration, current time might be effectively used for solving these problems,” Kheladze, CU, CSB, says.
Jacobashvili’s prognoses about the end of the economical crisis are closer to Central Bank’s prediction. “I think the recovery process will end by the end of 2009 in the USA, and by the middle of 2010 in Europe, according to the estimates of the European Central Bank itself.”
Making prognoses about the end of the crisis is considered to be on the same level as making a weather forecast for Gelitashvili. “Most experts presume that the crisis will continue till the first part of 2010. But we can already see some steps toward a calming of the crisis. Some experts are afraid that interrupting the crisis for a short time will cause worse results in the future.”
“People argue about whether it is good for the Government to intervene in regulating the crisis. But the fact is that in regulating the crisis there is huge weight put behind official’s words. After 9/11’s acts of terror Alan Greenspan, Chairman of the Federal Reserve, did that. He had huge authority over people and appealed to foreign investors and businessmen to stay calm and promised to finance each organization that needed help,” Gelitashvili says.
Gelitashvili notes that making nothing in trying to avoid the crisis will be worse. “Of course helping everyone is less trustful but his words stimulated the whole economy. Bankrupted companies are like drug addicts; the more you finance them the more they need. Each politician considers mistakes but doing nothing to avoid blunders will be a worse decision. And it will deepen the crisis. I think we must expect the end of the crisis in Georgia to be at the end of 2009.
The recent economical destabilization faces experts’ dilemma between the need of stabilization and modernization. Jacobashvili, GAU, tends to both of them, saying they are necessary for ensuring equilibrium. “They are complementary issues, but not substitutive and each market facing the crisis must be in need of modernization, as well as stabilization, in order to ensure the greatest possible higher level of its equilibrium.”
“The difference between them lies in political biases from the side of the state. As usual, the object of the stabilization policy is macro-demand, which could be steered by several instruments of fiscal, monetary and foreign exchange policy. In comparison, macro-supply is the object of the structural policy (capital markets; employment policy; export promotion; etc.),” Jacobashvili says.
“I think stabilization is just as useful as modernization, but to a certain extent. During recession markets become in need of stabilization. And in this case huge responses are needed by the Government. They must regulate and insure stabilization,” Gelitashvili declares.
Kheladze thinks that today the market is in need of stabilization more than modernization. “All negative experience is sufficient. We faced a lot of problems and it might be a good example and lesson for everyone. We will just see the case for changes based on correcting mistakes. Modernization must be done step by step.”
“The investment trap I mentioned above is expected in the big industrial nations, namely when yield expectations are minimal with the objective reason of the historically lowest interest rates. But liquidities aren’t scarce, and especially small countries could have preference of capital availability, for which the policy of “expensive money” is appropriate. The experience of the “Asian Tigers” (Korea, Indonesia, Malaysia, Thailand) from 1973-1976 seems to be the best example of advantage takings,” Jacobashvili, GAU, notes.
Experts have named the additional risks which can make the implementation of rescue programmes difficult.
“Structural risks are expected. For example, the auto industry (GM; Ford; Chrysler) cried out for help last December, 2008, and promptly tax payers forced out USD 20 billion. Such intervention was not only a bailout, but also a classical case of neglect of the structural policy in the last few years. When car production and sales become less advantageous than stock trading of the car maker company (the best example: Ford Motor Co.), then such a situation has a long lasting knock-on effect across the industries,” Jacobashvili says.
“The timely replacements of manufactures to developing countries are the only measure against the expected crisis. The markets are to modernize not after the crisis, but before the crisis expectation – this is the substantial mission of the economic policy and the policy makers should donate more attention to the warning systems. When the state budget shows a decline of tax revenues of the corporate and that happens over the years, then the Government should look for a way out,” Jacobashvili, GAU says.
For Gelitashvili, ESM, one of the main risks will be wrong politics of the Government and different organizations. “In 1994 a Japanese investing fund which had a huge amount of bad loans became bankrupted. Panic spread and a lot of other banks became bankrupted too. In the background to all this the Central Bank of Japan raised the interest rate. Meanwhile less people then wished to receive loans and after that an unprecedented crisis occured. The first reason was bad loans and the incorrect interference of the Central Bank. This example must not be forgotten and we must pay attention to the latest slip-ups.”
Georgian experts discuss the USA as one of the headquarters of the financial crisis, but not the only one. Every country was a ring in the chain.
“We can’t name the USA as the only result of the crisis. This was the result of all hegemonic countries. But stabilization of those countries which can be discussed as the main financial source of other countries will be the result of stabilization of integrated countries to this hegemony. The weakness of the main financial supporting institutes and political destabilization can be discussed as the main brake for developing and stabilization of the market. Entrepreneurial skills and adaptation to new changes will help the company to survive,” Kheladze, CSB, declares.
“The influence of the U.S. economical crisis will affect its trade partner countries. Stabilization of the U.S. economical situation won’t automatically arrange the same situation in other countries. Imagine that the situation in the U.S. calms down in two years while others did not pay any attention to its development and enforce the wrong politics, the U.S. stabilization won’t be able to help them,” Gelitashvili notes.
The economical crisis impacted almost every country revealing heavy losses. “The economic recession is present in the whole world. The slowdown of macro-demand is hitting each country. For example, the magnitude of the crisis for Europeans is considerable because their export oriented economies are facing the forfeiture of the market shares for their products (cars; chemistry; etc). Such a situation leads to an investment trap and the spiral of deflation with higher unemployment. Russia and Iran have become the biggest losers. Both economies have significant structural problems in addition to political risks, making investors very careful, increasing the probability of an economic depression over the next few years,” Jacobashvili says.
Written By Madona Gasanova