For students interested in economics and international relations
Author:Shivanshu
Hi! My name is Shivanshu Ojha, I’m from the Himalayas but currently living in Tbilisi, Georgia. My interest in politics and economics comes from my keen interest in rationalism and analysis of human psychology. I taught myself basic economics and politics – to help me understand the human psyche. From then on, I’ve kept developing this interest and since 2018, have analyzed theories and principles of economics.
Since the dawn of time, Georgia has remained at the crossroads of Europe and Asia. It lies in the Caucasus and is the only country in the region that has access to the sea. The government of Georgia has realized the full potential of turning Georgia into a transit powerhouse.
Over the past few years, Georgia has been heavily investing in improving it’s connectivity with its neighbors, including Russia, by building higher capacity highways and repaving pothole-ridden roads. By 2032, it is expected that Georgia’s main economic artery, the E60, will be motorized. This corridor will allow for more traffic on the E60, or S1, the only artery that links west to east Georgia.
A picture of the E60 currently in Zestafoni.
Present Situation
Currently, the E60 is full of heavy duty trucks while being an open access two-lane road. The road is prone to damage and often closed due to the weather. This weakens Georgia’s main economic artery as it limits the ability to exchange capital and goods. Therefore, it also raises the costs of companies to ship across the country or to other countries. This results in many shortcomings such as limiting Georgian exports and hampering the prospects for many companies here.
In turn, this makes Georgia reliant on foreign imports, which means that Georgia consistently runs a current account deficit. To be honest, Georgia has been running a trade deficit since gaining independence. Therefore, the Georgian Lari must be strong in order to make imports cheaper, otherwise there will be imported inflation triggered by rising import prices.
Plans of the Georgian Government
With this in mind, the Government of Georgia has decided to convert the E60 into a motorway which will allow for faster transits between Azerbaijan and Turkey, as well as improving the Georgian military road S3.
Current roadmap of Georgia
This will reduce the cost of transportation of goods and capital, therefore, reducing the likelihood of imported inflation, along with increased competitiveness of Georgian firms as costs will be reduced. Other smaller upgrades on the S12 and S2 are underway which will further reduce the costs of transportation in Georgia which will help Georgian firms and make Georgia a transit powerhouse in the Caucasus.
Conclusion
A comparison of Georgia to its neighbors.
Regardless, there is much work to be done as shown above. This can be touted as a success in increasing the potential output of Georgia, but it is hard to say this will help increase it to its full potential as Georgia still needs a lot of work in many areas of infrastructure which the Government, in its new 10 year plan, has laid out. With further improvements in these fields, it is safe to assume Georgia will increase its potential output and keep growing at a rapid pace.
As COVID-19 infections throughout the world rise, especially with the Delta variant — a mutated version of the virus — it brings into question, when will we get back to a new ‘normal’. While parts of the world are already returning to a pre-pandemic norm, countries in Africa still lag behind in securing vaccines for their healthcare workers. Until the world can ensure a safe and equitable distribution of vaccines, there will be no normal — for a while.
The United Kingdom
Dubbed “Freedom Day,” the United Kingdom is returning to pre-pandemic normalcy. All restrictions have been lifted, and with 68.8% of the population having received a 2nd dose, all is going well, until you start to take into account the steady rise in infections — especially with the transmissible Delta variant, which killed thousands in India a few months ago. Like Shakespeare’s play on words, this is another gamble with the economy. For the past few months, the British economy has been stagnating, recent consumer trends show that household expenditures decreased by 11% when compared to Q3 2020-2021, and a loss in consumer spending hurts aggregate demand in the UK. This has a negative effect on the GDP and led to a loss in income, rise in unemployment, and consistent failures to meet monetary policies set forth by the Bank of England.
Downing Street is now trying to get people back out: partying, eating, drinking, and working; and throughout the western world, governments have taken similar approaches. Across the pond, the United States is, for the most part, open, while Canada is coming out of lockdown. Lockdowns have hurt local business, people are frustrated and government debts and deficits have taken a toll on the state. However, in most of the Western world, we see that vaccines are readily available, but most countries still do not have enough vaccines to return to a ‘new’ normal.
Georgia
Countries such as Georgia, Ukraine, or Belarus for example are not relatively poor states — in comparison to the rest of the world — but lag behind in vaccination rates. Vaccine hesitancy is rampant among the public and even with government encouragement, few people volunteer to take it, and in order to save their economies, prematurely opened up. This leaves them vulnerable to COVID-19, which delays the world’s return to normal, and raises a philosophical question: do the ends justify the means for some countries that are opening up prematurely due to vaccine shortages? For example, the IMF predicts Georgia will grow at 7.7% this year due to opening up prematurely, but amid rising delta infections, hospital beds filling up, and exhausted medical and financial resources, it is very possible many will die in the next wave.
However, Georgia isn’t alone. There are a hundred other countries facing the same question. Do the ends justify the means? What to prioritize? Nonetheless, getting the jab is important — no matter where you live — as it means you are one less person to vaccinate and more vials can be donated to other, lesser developed countries. The faster vaccines can be secured for poorer, lesser developed nations, the faster we will return to a ‘new’ normal because a dozen nations don’t represent the world. The longer it takes to vaccinate any human, the longer this pandemic drags on, and the longer you’ll wear a mask. So, if you have the opportunity to do so, take your dose as it’ll help strengthen the world from a virus which churned the world to a halt.
Vision 2030 is crown prince Mohammed Bin Salman’s — or MBS as the western media calls him — crown jewel. The kingdom is slowly starting to tip the iceberg and moving towards a more diversified economy and developing its economy, which today is mostly selling oil. To understand the motives of Vision 2030 and evaluate its effectiveness, we must dial back in time.
The country that is now Saudi Arabia has its origins in the 1900s when a country popped out of nowhere in the Arabian peninsula and proclaimed its independence. It was a very poor country. In fact, very poor could be an understatement. The Kingdom of Saudi Arabia was struggling to fund itself and make ends meet (Almtairi).
The discovery of “black gold”
It was during this time that British geologists started to see that the Arabian/Persian gulf had something that can power machines en masse: black gold. Across the gulf, the British had struck a contract with the Persians to let them extract oil in Abadan. Even though the initial investors were private citizens, the onset of world war one brought about changes in the British attitude about oil. Due to oil having a higher energy density than coal, and it being more reliable, the British government became the spearhead for the Anglo-Persian oil company (Lumen Learning).
In 1938, this black gold was found in a field near Dammam by an American-owned firm. The firm saw that Saudi Arabia could have billions buried under its surface. This company was later to be Chevron (National Geographic). In the 1940s, the US started to invest in the Kingdom of Saudi Arabia and developed ties. This was when the largest oil field in the world was found, causing the country to rise to prominence on the world stage. Saudi Arabia has remained there ever since. The newly exploited black gold littered the country with investment, which was funneled into developing the country. Roads were built, pipelines were built and the people started becoming rich (Council on Foreign Relations).
The formation of OPEC
Diagram which illustrates the oil boom by Paasha Mahdavi
The steady stream of investments pouring into the country was the start of the ‘good times’. The Kingdom got richer and as the world demand for oil skyrocketed, its stage on the world stage rose, too. Saudi Arabia later formed the OPEC, an organization which consists of oil exporting countries. OPEC, economically speaking, is an example of an oligopolistic firm: colluding in the free-market to influence the price of oil.
Diagram representing profit maximization by a price-fixing cartel.
By the establishment of OPEC, Saudi Arabia and other middle eastern nations were able to exploit the oil market by fixing prices in accordance to what they wanted. This is illegal in most countries, but on a global scale, this is very normal and common. The organization would sell their oil at a price of P1 on the market, and the quantity sold would be QPROFIT. The sketched area represents the profit made by the OPEC. Now imagine this on a global scale. This is what brought immense wealth to the Saudis; and many thought that this system would hold (National Geographic).
However, this idea was flawed. Oil is a scarce resource and with ever growing demand, it is being exhausted quickly. However, the bigger issue is that now there are two threats to the economy: the demand for oil has tapered off in developed countries causing crashes in oil prices and secondly, oil deposits, nonetheless, are running out. This is a dilemma Riyadh faces. The country, despite being extremely blessed with oil and wealth, has started to face shortages in cash due to the falling oil prices. Falling prices mean that it is harder for oil-based countries to break even. This means that they are more likely to have deficits and build up debt. This is not in the interests of the central bank, and neither is it good for the economy in the long-run. Secondly, with the fall in demand from countries such as the US, Canada and the EU, the oil market is being over-supplied more often which, possibly increases the chances of lower oil prices.
How Saudi Arabia has responded to decreasing oil prices
With price wars, falling demand for oil, and oil being cheaper-than-ever-before in history, Saudi Arabia has realized that this phenomenon of black gold is fading, and that they should revolutionize their economy to respond appropriately. According to MBS and the published plan, the plan is to:
Turn Saudi Arabia into a powerhouse for investment.
Use the Kingdom’s geographic location to diversify the economy.
Open a relatively closed-off-state to one that is open and inviting to all.
MBS and the team behind Vision 2030 are highly ambitious. They want to change how Saudi Arabia functions and runs. Everything mentioned in the plan are regular government-adverts for investment, however, what is striking is that the Kingdom is trying to invest elsewhere and move away from oil. This shows us that the government realizes that oil is a dying resource and is seeking to industrialize Saudi Arabia — not fueled by oil, but by pure willpower and costs.
With COVID-19 impacting oil demand, and since oil accounts for most of the Saudi budget, it can be argued that the Kingdom has had the first major setback when it comes to Vision 2030. Nonetheless, they are making progress. MBS has been at work fixing issues and making Saudi Arabia more open. For example, the easing of visa restrictions will make it very easy to visit the nation and invest in it. However, with the advent of the pandemic, it can be questioned how effective the policy will be. Will it lead Saudi Arabia out of the oil trap, or fail to? Only time will tell.
In the 1970s, Beijing liberalized the economy, opening it up to foreigners, and adopting policies that promoted free trade. These were similar to glasnost and perestroika, which were implemented in the USSR. The hope was that millions of Chinese could be lifted out of poverty and into prosperity. While Deng’s reforms started in agriculture, he slowly branched out to include industry as well. A perfect example is Shenzhen, now a bustling metropolis, back then it was a shanty-town. He decided that the Pearl River delta should spearhead the liberalization. The PRC created special economic zones with little oversight, where foreign firms could trade freely with minimal interference from Beijing. This was adopted throughout China as the try-outs were successful, accelerating China’s economic growth.
Analysis
China progressed and grew — to the shock of many economists as no country on earth had ever grown at the rates China did. This raised the net output of firms in the economy, therefore increasing the GDP. As the Chinese adopted friendlier policies, the GDP rose further as China became a lucrative investment destination ceteris paribus. Mathematically speaking, as GDP is Consumer Spending, Investment, Government Expenditure, and Net Exports (Total Exports – Total Imports) added together, as China grew its reputation on the world stage and investments from abroad grew raised the GDP, imports remained stagnant due to an uncompetitive Yuan. Meanwhile, exports also increased, raising Net Exports (Total Exports – Total Imports), having a ripple effect on the GDP too.
GDP of China [PPP] from the World Bank Database (CC BY-4.0)
As China started to industrialize, the wages grew at rates never seen before. It looked like China had the perfect deck of cards to become an industrialized nation, which it did — as China is a newly industrialized country. However, this came with many downsides: externalities and inequality.
Externalities are a cost or benefit placed on a third party. They can be positive or — as in China’s case — negative. The costs to produce outweigh the cost to society from the production in markets. Therefore, there is a welfare loss. As there is a welfare loss, society is worse off — this can be in the forms of pollution, increased health risks, lower life expectancies, or otherwise. The welfare loss exposes the public to harmful particles and extreme air pollution. Now, this leads us to question how well-off are the Chinese? Even though rapid economic growth has increased wages and lifted many out of poverty, and the effect of increased GDP has had direct consequences on the Chinese, nonetheless, one result of rapid unchecked growth is inequality. As The Economist reported in 2015 and 2019, education is highly unequal. Access to education helps individuals earn more due to the development of skilled labor and allows firms larger access to a larger pool of individuals with specialized skills. However, as stated in both the articles, most Chinese schools are now jam-packed with elite, wealthy kids; and uneven wealth distribution, like in the United States, has led to the degradation of the quality of education received by rural Chinese. This can cause them to struggle in the gaokao, an all-important university exam, viewed by many rural Chinese as their only way out. However, the government has been attempting to fix this. Beijing has suggested that educational reforms are needed. There is also the big North-South divide. Farmers in the north cannot earn enough to live, so they migrate to the south to become laborers or factory workers. As they live in poor neighborhoods, this increases the chances of their children scoring poorly on the gaokao.
Conclusion
Nonetheless, China has had tremendous success in eliminating poverty. Its people — once some of the world’s poorest — are now living in a modern country. However, many challenges are facing the Chinese. The ones discussed here are scratching the surface; some others include depopulation, firms’ inefficiency, unemployment, and an overheating economy.
After the collapse of the USSR, Georgia experienced an economic crisis. In the USSR, it was known as one of the most beautiful republics of the Soviet Union. The cobblestone-lined streets of Tbilisi and the scenic mountain views of Kazbegi, attracted millions. However, after the downfall, there were no tourists. This was just a piece of what Georgia lost, of course it lost Abkhazia and South Ossetia too. The country slipped into civil war, millions lost their jobs, factories closed, and inflation rose exponentially.
GDP Deflator, Inflation, World Bank, CC BY-4.0
GDP Per Capita [PPP], current US$, World Bank, CC BY-4.0
This led to most of the economy shutting down, and millions going hungry. After 1993, Georgia went through en masse political unrest, and there were some reforms, but it was after the Rose Revolution that the economy witnessed severe changes. During Saakashvili’s reign, he made sure he grew the economy and this is seen by GDP per Capita rising. It was then that investment into Georgia rose, tourist arrivals, and the lost industry developed. Shown by the graphs below.
International Tourist Arrivals, Data from World Bank, CC BY-4.0
FDI Inflows into Georgia [in % of GDP], World Bank, CC BY-4.0
Saakashvili promised economic reforms and delivered, however, he did turn into a totalitarian, Draconian dictator. In 2008, Georgia fought over its territory. Nonetheless, one of his most important legacies were reducing corruption, increased trade, development — e.g., making it easy to do business — and cooperation with the west. Then came another party, which continued his legacy, and continued to develop Georgia with the same tactics he had used — for example the IT sector, and exports. [Happened because of the country’s low crime rate increasing investor psyche, therefore giving them the thumbs up to invest].
Georgia’s trade rating 2005-2013, [1 = low, 6 = high], World Bank, CC BY-4.0
Georgia’s Exports in Billions [current US$], World Bank, CC BY-4.0
Two years ago, Georgia crossed into the very high HDI category. This marks a new era as the country prepares to potentially enter the European Union in the future, and enhances its relations with Brussels. But it stands testament to the Georgian miracle. By far, Georgia is not like the Korean, Singaporean or Japanese miracles, but its fast rise from a war-torn nation in the 1990s to a modern, prosperous, free republic in the Caucasus is miraculous albeit a small victory, but compared to other former-soviet states, and one with no resources, Georgia is a celebratory success story.
I picked up this book in 2017 — around six years after the publication — and I could not put it down. Why Nations Fail by Daron Acemoglu and James A. Robinsonseeks to explain why some nations are rich while others are poor. The authors present a simple hypothesis: institutions. If you like reading about institutional economics, Why Nations Fail is a must-read. Even though the book does contain some hard-to-grasp concepts, it is highly readable. Even though I first read it a few years ago, I come back now and then to reread it. As in the words of Steven Levitt, “Brilliant in its simplicity and power.”
Next week, Americans will cast their ballots. They will choose the incumbent, Donald J. Trump, or running ex-vice president, Joe R. Biden.
No matter what, one will win. That president will bring in new edicts, decrees, and due to COVID-19, stimulus packages to assist a restart of the American economy. This will result in different possible economic effects: whether on Wall Street, in firms, or the hinterlands.
Nonetheless, Americans are bracing for the third of November. You can find a few articles below which will broaden your knowledge of the economic effects of the US elections on Washington’s national policymaking and possible economic predictions below.
