Resume: The internationally recognised indicator to assess an economy is the gross domestic product (GDP). The GDP is the market value of all of the final goods and services produced within a country. The higher a country’s annual GDP growth is, the better it is reflected upon the well-being of that country’s population.
In 2018, Georgia’s real[1] GDP increased by 4.7%. The total economic growth rate in the EU constituted 1.9% in 2019, the German GDP increased by 1.5%, the UK GDP increased by 1.4% and the US GDP growth was 2.9%. Therefore, Zakaria Kutsnashvili’s figures are not fully accurate. Even if they had been factually accurate, however, making a comparison of a developing country’s economic growth figures to those of developed countries in this manner is pointless and misleading for a variety of reasons.
In the first place, the base effect is important. In particular, a change in small figures gives a bigger percentage difference as compared to changes in big figures. For instance, if citizen A’s income was GEL 100 in 2017 and that income increased to GEL 190 in 2018 whilst citizen B’s income was GEL 1,000 and increased to GEL 1,800, then citizen A’s income increased by 90% and citizen B’s income increased by 80%. If we ask the question as to which citizen had a more successful year, there is no straightforward answer because A’s financial resource increased faster in terms of percentage whilst B’s budget accumulated more funds. This analogy applies to countries, too. In wealthy countries, even a marginal percentage growth of the economy equals large sums of money. Of further note is that because of unutilised economic resources/potential, developing countries have strong prospects of growth and their economic growth figures are usually higher.
Therefore, in order to compare a certain country’s economic growth rate to those of other countries, it is relevant to make the comparison with a group of countries with relatively similar characteristics. In the aforementioned case, a comparison of countries with substantially different economic development levels does indeed mislead the public. Comparing Georgia’s economic growth rate to the GDP growth of developed countries is pointless and, in this case, also manipulative because the audience thinks that the economic dynamic and conjuncture are better in Georgia in this period as compared to the EU countries and the US and the only problem Georgia has is that developed countries are ahead of us in terms of their development.
Analysis
On 8 April 2019, on air on Diana Trapaidze’s TV broadcast, Dgis Ambebi, Georgian Dream member, Zakaria Kutsnashvili, stated: “Germany’s GDP growth rate is 1.17%. Ours is 4.5%, Great Britain’s is under 2% and the US growth rate is 1.2%. Therefore, our 4.5% is two and three times higher than theirs. As these countries are far advanced, our current 2-3% growth rate does not mean that we will catch up to these countries in two or three years. We are ten and 20 times backward and this is why we need a growth rate this is four and five times higher. With the current growth rate, Georgia is on average two and three times ahead of European countries. These are objective indicators and any economist would confirm that.”
The internationally recognised indicator to assess the economic situation and a country’s well-being is the gross domestic product (GDP). The GDP is the market value of all of the final goods and services produced within a country. The higher a country’s annual GDP growth is, the better it is reflected upon the well-being of that country’s population.
In 2018, Georgia’s real GDP increased by 4.7%. The total economic growth rate in the EU was 1.9% in 2019, the German GDP increased by 1.5%, the UK GDP increased by 1.4% and the US GDP growth was 2.9%. Therefore, Zakaria Kutsnashvili’s figures are not fully accurate. Even if they had been factually accurate, however, a comparison of a developing country’s economic growth figures to those of developed countries in this manner is pointless.
In the first place, the base effect is important. In particular, a change in small figures gives a bigger percentage difference as compared to changes in big figures. For instance, let us consider the changes of the incomes of citizens A and B as given in Table 1. In this case, citizen A’s income increased by 90% and citizen B’s income increased by 80% although the growth of citizen B’s income is GEL 710 higher. If we ask the question as to which citizen had a more successful year, there is no straightforward answer because A’s financial resource increased faster in terms of percentage whilst B’s budget accumulated more funds.
Table 1: Case of Nominal and Percentage Changes
Georgia’s GDP was nearly GEL 41 billion in 2018 whilst the US GDP was USD 20.9 trillion and even a marginal percentage growth of the latter’s economy is translated into vast sums of money. Of note is that because of unutilised economic resources/potential, developing countries have strong prospects of growth and their economic growth figures are usually higher.
Whilst doing a comparative analysis of GDP figures, it is important to analyse them vis-à-vis the amount of the population. It is relevant for comparison to analyse the GDP dynamic in international dollars per capita (PPP). The PPP indicator adjusts the GDP in terms of price levels.
Table 2: GDP Per Capita in International Dollars (PPP) in 2017-2018
Source: International Monetary Fund
In this case, too, the GDP growth in international dollars is higher in developed countries although Georgia is the leader in terms of percentage growth because of the base effect.
The relatively lower economic growth rate in developed countries is caused by the economic effect which is also known as the so-called diminishing marginal return law. This means that employing an additional unit of the factor of production (human resource, capital) causes a smaller increase in output. Developed countries almost fully utilise their existing production resources and technologies and being close to their maximum level of output, they therefore have limited room for further growth. Developed economies achieve fast growth only under significant technological progress which allows a more efficient use of their existing resources or in a post-crisis period when they return to the pre-crisis level of production after a temporary decline. In turn, developing countries are far from their maximum level of output, they do not fully use their production factors or they are afflicted by the lack of them (mostly technologies and capital). Therefore, they have an opportunity to achieve a relatively high so-called catch-up growth[2] by fully utilising their potential as well as by copying technologies and attracting capital from developed countries.
