ABSTRACT. This study mainly investigates the evolution process of
entrepreneurial skills in transition economies. Furthermore, it investigates
the current barriers that hinder the development of these skills in such
economies with a reference to Georgian economy that has been
experiencing a transition from a centrally planned economy into a free
market economy. It also offers some solutions to surmount these obstacles
being questioned. Hence, we interviewed some of the entrepreneurs in
Georgian Lilo market both, in 2004 and 2010. In addition to the
interviews, we have exercised our own observations about the market, the
entrepreneurs therein, and the whole Georgian economy to clarify the
matters of investigation of this paper. The findings prove that the
entrepreneurial abilities of the interviewee businessmen have been in
progress. They are able to perform many economic activities they would
not have been able to and they even did not know how to under socialist
rules. They can build their own businesses, produce, sell and buy, export
and import all kinds of goods and services on their behalf. Georgia is on
the way to having contemporary entrepreneurs of free market economies
in spite of the hindrances that retard the development of their
entrepreneurial abilities.
Evolution of entrepreneurial skills in transition economies the case of georgia
1. See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/290086813
Evolution of entrepreneurial skills in transition economies: The case of
Georgia
Article in Transformations in Business and Economics · January 2013
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57
Received: November, 2011
1st
Revision: January, 2012
2nd
Revision: May, 2012
Accepted: September, 2012
ABSTRACT. This study mainly investigates the evolution process of
entrepreneurial skills in transition economies. Furthermore, it investigates
the current barriers that hinder the development of these skills in such
economies with a reference to Georgian economy that has been
experiencing a transition from a centrally planned economy into a free
market economy. It also offers some solutions to surmount these obstacles
being questioned. Hence, we interviewed some of the entrepreneurs in
Georgian Lilo market both, in 2004 and 2010. In addition to the
interviews, we have exercised our own observations about the market, the
entrepreneurs therein, and the whole Georgian economy to clarify the
matters of investigation of this paper. The findings prove that the
entrepreneurial abilities of the interviewee businessmen have been in
progress. They are able to perform many economic activities they would
not have been able to and they even did not know how to under socialist
rules. They can build their own businesses, produce, sell and buy, export
and import all kinds of goods and services on their behalf. Georgia is on
the way to having contemporary entrepreneurs of free market economies
in spite of the hindrances that retard the development of their
entrepreneurial abilities.
KEYWORDS: Entrepreneurship, Transition Economies, Socialism, Free
Market, Soviet man.
JEL classification: 26, N85, P39.
Introduction
An economy may have abundant supply of land, labour, and capital, but without
entrepreneurial ability, these resources will not be combined efficiently to produce goods and
services. Unless a country has a class of entrepreneurs who are able to bring together the
resources and take risk of profit or loss, a sustainable development may never be completed
(McEachern, 1997, p.809). Entrepreneur is an indispensable man of production. Many
scholars have dealt with the functions of an entrepreneur so far. According to Carl Menger, an
Austrian economist, entrepreneurs emerge as people who discover and take advantage of
opportunities for profit, making goods that previously did not exist and finding new ways to
create existing goods (Backhouse, 2002, p.176). Richard Cantillon, an Irish merchant, gives
particular importance to entrepreneurship. To him, entrepreneurs, he call them undertakers,
are people who buy goods either to engage in production or to trade them without any
assurance that they will profit from their activities (Cantillon, 1959).
Another Austrian economist, Schumpeter, places the entrepreneur at the centre of the
process of capitalist development. Entrepreneurs are responsible for innovations that open up
new opportunities for making profit. Successful entrepreneurs earn high profits and imitators
enter the market. Over time, the profits earned by the original innovator are eliminated by
imitation, and the system settles down to a new equilibrium until it is disturbed by another
innovation. Schumpeter¶s vision of capitalism was thus one of the continuous motion systems,
the impetus for change coming from the entrepreneur (Backhouse, 2002, p.208). Schumpeter
argued that the success of capitalism would result in the rise of the standard of living for all
classes. Nevertheless, capitalism would eventually destroy itself for it would destroy the
values on which its success was based. Entrepreneurs would give way to bureaucracies, self-
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interested individualism would undermine workers¶ loyalties, and capitalist values would give
way to a desire for security, equality and regulation (Backhouse, 2002, p.209).
An entrepreneur organises resources for production, introduces new products or
techniques of production, and reaps financial rewards or bears the consequences of such
endeavours. The task of an entrepreneur is to manage a series of largely personalised
interdependencies under conditions of uncertainty, and limited resources. The world of
entrepreneurs is, in a sense, surrendered by their relationships with customers, marketing
channels, suppliers, employees, families, regulatory authorities, banks, accountants,
competitors, and indeed all those with whom they must necessarily transact. To manage these
transactions, the major concern is to reduce uncertainty and transaction costs, mainly via the
strength of personal network (Gibb, 1996, pp.3-4). As a matter of fact, the development level
of an entrepreneur¶s skills plays the deterministic role in fulfilling its duties ideally.
It is indisputable that entrepreneurial skills are like living beings and subject to
transformation. They develop only under proper circumstances. They can deteriorate unless
proper circumstances are met. This study aims at investigation of the evolution of
entrepreneurial skills in transition economies with a reference to Georgian economy. It also
tries to find out the current hindrances that retard the development of these skills, and offers
some solutions to overcome them. Hence, we interviewed some of the entrepreneurs in the
Lilo Market in Tbilisi both in 2004 and 2010. In this six-year period of time, many laws were
launched to redesign the Georgian business life, which enabled the entrepreneurial skills to
transform. Business environment changed rapidly throughout these years. Therefore, having
made interviews in both years within a six-year interval provided comparative findings about
whether entrepreneurial skills in Georgia developed, and the barriers against the development
of entrepreneurial skills were removed. To supplement the interviews, we have exercised our
own observations about the market, the entrepreneurs therein, and the whole Georgian
economy to clarify the matters of investigation of this paper.1
1. Entrepreneurship in Soviet Socialism
From the revolution of 1917 to the onset of collectivization and urbanization in the
early 30¶s soviet society consisted of three major classes: peasants, workers, and state-party
bureaucracy. Peasants constituted the overwhelming majority. Although collectivization,
industrialization, and centralized economic planning jointly increased the size of the urban
working class during the next seven decades, they did not expand the power of working class.
The decline in the power of working class led to a steady growth in the bureaucratic power of
the state-party. The stupendous bureaucratization required by the state ownership of the
productive property, abrogation of market relations, and comprehensive economic planning
implied extension of the state-party bureaucracy plus amplification of its already formidable
power (Mayer, 2002, p.759). Soviet society¶s tie with its own historical reality was severed
under socialist administration. It was a close society in any sense. Circumstances forced all to
adapt to the new and harsh realities. Massive urbanization, heavy industrialization, the
stripping of peasants from the countryside, technical advances, mass education, and many
other realities accompanied the social and political revolutions. These new realities were
actually rapid, and minimally prepared processes. People could be adapted to the system by
1
One of the authors of this study, Ozsoy, lived in Georgia between 1999 and 2006. The other author, Dilanciev, still lives there. Therefore
both authors closely witnessed the changes in Georgian business life, and the development of entrepreneurial skills in Georgian economy
after the collapse of socialism.
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lowering one¶s requirements of consumption and value, by re-evaluating symbols, for
example, making the transition from egalitarian to hierarchically distributed values. In this
process, peasants became workers at state enterprises, representatives of the professional
occupations became civil servants, and political leaders became bureaucrats.
In spite of the entirely changed social and economic environment, the Soviet
experiment, which aimed at producing a ³6RYLHWPDQRU+RPR6RYLHWLFXV´, failed to produce
a new, simple and completely socialized human type who was wholly adapted to the Soviet
aims. Instead, it created an individual whose ideas and needs were merely simplified. This
type of man had to adapt to a given and irresistible social reality. But, at the individual level,
the whole system inevitably led to a moral corruption, the acceptance of sham, the padding of
figures, string pulling, bribery, and doublethink (Levada, 2001, pp.7-8). Formed under the
conditions of the command economy, Soviet man was frightened and oppressed by the state
machine and totally depended on the state. He was just a worker who had to work for mainly
state-owned enterprises or in farms assigned for him by the state, or a manager who had to
fulfil the central plan. But he was never a self-initiative entrepreneur. He was deprived of one
of his strongest tendencies, free enterprise together with the other democratic rights. He never
had the right to possess factors of production, to build his own business, to trade, and to
pursue his own interest. He would be called µgreedy¶, and his activities would be interpreted
as µshameful deals¶ if he was noticed doing so. Besides, the government would punish him.
Entrepreneurial abilities of a Soviet man were suppressed, therefore, diminished, misdirected,
and eroded as a consequence of being deprived of the liberty of free enterprise, and being
swamped with bureaucracy and converted into a mechanical robot.
Soviet system imposed fundamentally unrealistic duties on the individual. The
³JUDQGLRVH SODQV´ could not be fulfilled and completed without figure padding, and the
³FRPPDQGHHULQJ´ of resources. Consequently, a Soviet-style µdeceptive man¶ instead of the
expected µSoviet man¶ was created. The success of the system would have been impossible if
it had not been based solely on mass coercion and mass deception. The individual, deprived of
any opportunity to resist, agreed either solemnly or silently with the imperative prescriptions
while persistently µlooking for loopholes that would enable him to avoid them¶. Deceptive
man was not only put up with deception at every level and in all its forms, but also was ready
to deceive himself for the sake of self-preservation in order to justify his own deception.
People deceived each other just to meet the plan and get the payments for plan fulfilment and
over-fulfilment from the ministries (Ryapolov, 1966, p.122). It could be said that the whole
mechanism of the system depended on µdeceptive slaves¶ and µdeceptive bosses¶. Both
deceived each other as well as themselves. Under conditions of universal deception, the
fulfiOPHQWRIQRUPDWLYHLPSHUDWLYHVEHFDPHDPRUHRUOHVVGHFHLWIXOGHDORIWKHVRUWRI³ZH
SUHWHQG WR ZRUN DQG WKH SUHWHQG WR SD XV´ 7KH GHFHLWIXO PLQG FRXOG HDVLO VXUPRXQW
provisional barriers and find numerous loopholes in prescriptions or, to put it briefly, play µa
game without rules¶ (Levada, 2001, pp.28-29). The system brought up a man who obeyed
rules when he was forced and frightened, but violating them and acting as he wished when he
was left or felt free. Though the party-state duality characteristic of Soviet social structure did
not parallel the political-administrative bifurcation, the bifurcation was embedded within the
party-state duality. In some ways that division corresponded to the separation of the
ownership-management found within the dominant classes of corporate capitalist societies. In
other words, the state owned and the party managed. The party actually arranged the
appointment of the managers/directors of the state owned enterprises (Ryapolov, 1966,
p.123).
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1.1 Soviet Manager and Suppressed Entrepreneurial Skills
The main duty of the managers in the centrally planned Soviet economy was to fulfil
the plan set for their enterprises by the responsible ministries under the centralized direction
of Gosplan¶s (the State Planning Agency) five year plan (Puffer et al., 1993, p.8). All
entrepreneurial skills were diminished or misdirected under the soviet system. But they did
not completely vanish at least for Soviet managers. There were no business schools wherein
management personnel could be trained. Before becoming a manager/director, a person would
experience a long period of technical training at a factory. He would start as a line engineer
and become a chief plant engineer. Only an engineer with a great deal of practical experience
could become a plant manager (Ryapolov, 1966, p.118).
During Stalin¶s dictatorship, µmanager¶ was a derisive term. Being a manager was a
precarious position. Professional communist leaders referred to their party colleagues who
were directors as µmanagers¶ and gave the term a derogatory and insulting connotation for
these managers frequently deviated from the general party political line and defended
production and economic interests. A plant director was not a boss. He was caught in a vise
between the party and the state organs and bureaucrats, on the one hand, and the plant workers
and employees, on the other (Ryapolov, 1966, pp.119-120). The formers pressured,
threatened, and punished. A µgood¶ director was not the one who concerned himself with the
needs of his workers; but the one who faithfully served the party. The party bureaucrats could
not harm the director if he dutifully and carefully implemented the tasks set forth by the party
and the state organs. But a catastrophe ensued for the director when he failed to carry out the
party¶s directives. Then the party tried to set the workers and employees against him, and,
under the guise of worker criticism, it would ruin him completely. A great deal of
responsibility was imposed on the Soviet director. The scope of his responsibility was so great
that he was constantly subject to political or criminal action. In order to be always prepared to
defend himself, he issued a tremendous number of written orders and directives. It was
completely immaterial that no one carried them out. What was important was that they could
be used for the defence in case of a plant investigation (Ryapolov, 1966, p.120).
Bureaucracy and the party could be said to have converted the director and the chief
engineer into mechanical robots for carrying out their unrealistic plans by crudely threatening
them with a stick. The administrative bureaucrats rarely visited the plants. When they did, it
was not for any purpose other than for enforcing authority, preparing charges, or imposing
penalties. Moreover, the party placed politics before economics. In contrast, managers held to
the opposite view that economics and technology were more important and that politics
should serve to advance them. They could see economic setbacks caused by the communist
dogma. Consequently, they tried to soften and reduce the damage by doing everything they
could think of to thwart the politicians, though it was not easy to do.
The party exercised a great deal of control over the plant director. The plant director
and the chief engineer lived in the midst of constant conflict among the administration of
ministry, party apparatus in the plant, the trade union, and the workers that all had their own
interests and demands. Monetary bonuses for plan fulfilment were also granted by the
administration chief or the minister. There might have been, however, a great number of
reasons for denying the bonuses. In the critical analysis of management practices taking place
in the Soviet press, the planning system was strongly criticised. It was precisely this system
that bred bureaucratic methods of management and retarded economic development. The
critics claimed that the planning system had outgrown itself (Ryapolov, 1966, p.124). The
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economy of the country had become so complex that central planning and coordination of all
economic operations were becoming impossible. Approximately 10 million people were
engaged in various stages of planning. It was not really possible to employ generally accepted
methods of good economic management within so many confines of the Soviet socialist
economy. That is why the directors of industrial enterprises could not exercise their skills and
initiative under such a system (Ryapolov, 1966, pp.123-125). The skills were reduced,
misdirected and misused.
1.2 Failed Attempts to Rehabilitate Entrepreneurship
Following Nikita Khrushchev¶s ouster in 1964, which was partially due to the failure
of his efforts to revitalize agriculture and reorganize industry, Moscow¶s new leaders
launched their own program to rejuvenate the creaky Soviet system of centralized economic
planning and administration. Doing so, they were guided by the theoretical writings of
Liberman, a Soviet economist who proposed to upgrade considerably the role of profit in the
Soviet economy. Profit was to become the prime mover of the economy and a major stimulus
in the growth of labour productivity. Economic process was to develop from the bottom, not
from the top. These proposals were evaluated in the West as µcreeping toward capitalism¶,
which in fact they were. The so-called Liberman reforms were designed to decentralize
economic decision making for the first time since central planning had been introduced in the
1930s. Managers were to be given considerable discretion and charged with making a variety
of microeconomic production and investment decisions. Their enterprises were even to be
charged interest on the total amount of capital used. With this newfound latitude, managers
were expected to take risks, innovate, reduce costs, and thereby increase the sales and profits
of their enterprises (Magstadt, 1978, p.242). However, because these proposals affected the
basic principles of the communist doctrine and thus threatened the role and rule of the party,
Liberman was censured. When Liberman spoke again he softened his proposal and now it was
in terms more acceptable to the party. This time he proposed to upgrade the role of profit, not
for the purpose of promoting capitalism, but merely as an aid in evaluating and encouraging
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³$OWKRXJKSURILWLVQRWWhe purpose of production, it can be used as a guide in evaluating the
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economy to a purely functional status, as one of the numerous indicators of enterprise
performance. In fact, this was what the role of profit amounted to at that time. But the
entrenched party-state bureaucracy, at which expense the reforms would have come, quickly
aborted the embryonic reform movement. If Libermanism had triumphed, Soviet managers
would have had to operate like the Western entrepreneurs. Yet this achievement could have
been expected only if managers would not continue to be subject to as many plans and
directives from above as they had been in the past. Otherwise, they would really find
themselves in a bind because they would get all the pressures of competition from below in
addition to the ones that would come from above (Thorelli, 1965, p.47).
1.3 Perestroika and the Rise of a Capitalist Class
A capitalist class appeared in the Soviet Union only after the start of the second reform
period so called µperestroika¶ between 1986 and 1988. Three laws intended to stimulate
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economic activity were the Law on Individual Labour Activity (November 1986), the Law on
State Enterprise (June 1987), and the Law on Cooperatives (May 1988). These policies
enabled various forms of profit making activity within Soviet society. Some observers place
the origins of the Soviet capitalist class much earlier than 1986. For example, Bettelheim
(1975) suggests that bureaucratic control of state industry constitutes a special form of
capitalist property, and that parts of the Soviet bureaucracy were an incipient capitalist class.
However, if one defines capitalists as private owners of productive property that is used for
the purpose of making profits appropriated by the property owner, then a Soviet capitalist
class cannot be said to exist prior to the second reform period (Mayer, 2002, p.759). Through
these policies, enterprises were expected to be profitable, self-financing and to pay debts on
time, as well as to select and pay for capital investments with their own funds. On one hand,
they had no longer to depend on central buyers, and on the other hand, they ceased to have
access to no-cost funds (Puffer et al., 1993, p.10). They could obtain advanced technology
and were expected to evaluate the market for their products and even to advertise. Pricing was
to be decentralized in a limited fashion. They had the right to engage in import and export
(Puffer et al., 1993, p.11).
The results of a study, based on a survey that covered three time periods, five years
each from 1985 to 1995, showed that under µperestroika¶ the managers, at all hierarchical
level, exercised an increased authority in human resources and investment decisions in an
environment of government restrains and centrally developed policies. The study showed as
well that they expected even greater authority in the future (Puffer et al., 1993, p.19).
2. Entrepreneurship after Socialism
In this part of the study, the evolution of entrepreneurship after socialism will be
explained with a reference to Georgia.
2.1 Georgia before Socialism
In the Middle Ages Georgia was characterized by a social structure that linked land
owners and workers in a contract of mutual social obligation, an economy dependent on local
land and labour, a political system of independent land owning nobility loosely linked with
Church dominance, and a primitive agricultural technology. In the feudal Georgia, lords who
accumulated land also accumulated labour as well as the people living on the land. Business
people did not enjoy great prestige or power in the middle ages.
After the middle ages, trade, which served as a diplomatic tool and a means of
enriching the state, increased greatly in importance and volume. Many peasants were forcibly
ousted from their homelands and relocated. Others, finding that they no longer seemed to have
a right to subsistence, chose to migrate to areas wherein they could find work. The Industrial
Revolution in Europe had effect on Georgia but it was considerably low due to continuing
wars in Georgia. Nonetheless, it increased the role of capital as a primary factor of production.
Economy in that period was developing slowly but instantly till the conquest of Georgia by
Russia.
Before the revolution of 1917, Georgian society also consisted of three social classes:
peasants, workers, and state-party bureaucracy. Peasants were the overwhelming majority, but
workers, subject to political organization, played an important role in the Revolution.
Merchants were trading with other countries and gaining new entrepreneurial abilities.
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Georgian products were in widespread use in the world. The main trade partners of Georgia
were Russia, Turkey, and Iran. Entrepreneurship in Georgia was in its first steps of growing.
At the end of the eighteenth century, an overwhelming majority of young people were
studying in Russian and European universities and establishing businesses after returning to
Georgia. This would help them to discover their entrepreneurial abilities. Georgia was like a
battle field for neighbouring countries and there was no appropriate environment for the
development of entrepreneurship.
Under Soviet administration, entrepreneurs in Georgia, like in other Soviet countries,
were responsible for exacerbating income inequality, introducing another source of income
that is profit and loss. That is why entrepreneurs were vilified although they were generally
admired in countries with market-oriented economies for creating something of value.
Entrepreneurship was a traditionally risky business in the Soviet Georgia, where the role of an
entrepreneur was often not appreciated (Ragan et al., 1993, p. 4, 52).
2.2 Recovery of Entrepreneurial Skills in Georgia after Socialism
As with the other post Soviet countries, the fall of the Soviet system drove Georgia to
reform the political, economic and social structure of the country. The country has chosen
open markets and the rule of law as a path to economic growth in transition from a planned
economy to a democratic and free market system. Being homo Sovieticus during the Soviet
system, except for the managers whose entrepreneurial abilities were diminished or
misdirected, Georgian people virtually lost entrepreneurial abilities. With the assistance of
International Organizations a political base for a market economy was laid. The achievement
of a competitive economy required a number of policy achievements, including
demonopolization of the national economy, privatization of state property, liberalization of
economic activities, including liberalization of foreign trade, price and so on.
As the initial steps of transition to a market economy were taken in February 1992, a
new Anti-Monopoly Department was created. The main task of the reforms was to establish
the legal and institutional bases for anti-monopoly regulation in order to protect consumers
and entrepreneurs, to restrict and prohibit monopolistic activity, and to promote competition.
Georgian legislation and competition policy aimed at the promotion of entrepreneurship, and
the prohibition of unfair competition, anti-competitive activities, and misuse of market
position, mergers, and other actions which provoke or may provoke the restriction of
elimination of competition on the market. (Lapachi, 2001, p.375). The principal operational
provisions of the law on Monopoly Activity and Competition, dated December 1996, focus on
agreement among firms, dominant firms¶ behaviour, and market restructuring (Lapachi, 2002,
p.190). This law is considered to be a foundation of Georgia¶s commitment to free and open
markets. The long-term success of Georgia¶s economic reform is expected to depend on the
degree to which this law is enforced, and on the degree to which the proper type of man who
implements this law is available.
Dating back to the last decades of the Soviet period, homo transformaticus emerged in
Georgia as well. Many entrepreneurs of this transition period were considered good examples
of homo transformaticus. Georgia has already established the price system and is proceeding
on the way to having contemporary entrepreneurs. The poor fiscal situation, poverty,
unemployment, pervasive corruption, and the arbitrary implementation of laws and
regulations together with the limitations of the price system have been the main problems of
Georgia. The country is being affected by economic problems, growing popular nostalgia for
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the materially more beneficial µold days¶ and frustration over the apparent lack of results from
legislated reforms. Old-minded bureaucrats have seemed to be the most resistant power
against the reforms. Lack of sufficient staff to manage the new market system has appeared to
be an important problem, which is directly related with the high level of pervasive-natured
corruption. Being former state bureaucrats having neither appropriate knowledge nor
experience of market economy, many government officials have been trying to preserve their
influence over the independent entrepreneurs in sectors regulated by them. Many have had
their own private interests in regulated enterprises.
In spite of these problems, Georgia has cut considerably long way towards the market
economy. Free market competition exists in Georgia and it has been developing. Since
leaving the Soviet period, the country has changed prominently. The private sector has
sharply overweighed the public ownership. All business activities are largely liberalized.
Enterprises are entirely free in their market decisions. Prices and production level are
stabilized by market supply and demand. Competition among rival companies is severe,
forcing each of them to improve the quality of their production, or to add some specific items
distinguishing their goods from others. Georgian households started to face wider range of
options while making purchase decisions (Georgian-European Policy and Legal Advice
Centre, 1998). Farmers are free in their decisions, being not restricted by the amount of land
area they can own and cultivate, or by the number of cattle they want to have, and being also
free to bring their goods to the market and to sell them at market prices. Under new market
conditions, activities of individuals and households are absolutely freed from influence.
Enterprises have made operations more efficient, effective, have improved quality of the
products and have introduced distinctions in order to make them more attractive to consumers.
3. The Barriers to the Development of Entrepreneurial Skills in Georgia: The Case of
the Lilo Market
Upon the fall of the Soviet system, and the socialist economic order, which had
already started to deteriorate, Georgian authorities launched some laws to convert the planned
economy into a democratic and free market system. Through such a transitional environment,
Georgia has been proceeding on the way to having contemporary entrepreneurs of capitalist
economies. Georgian entrepreneurs, whose entrepreneurial skills once eroded or vanished due
to the strict rules and sanctions of the socialist system on entrepreneurs, seem to have
rehabilitated. Most of them import, export, invest, borrow from financial markets, establish a
partnership, and so on. But, despite the precautions taken so far, it is still observed that there
are still some barriers Georgian entrepreneurs are faced with, which hinder the development
of their entrepreneurial abilities.
In this part of the study, we deal with these obstacles in the case of post-Soviet
Georgian Lilo market. Hence, we interviewed some of the entrepreneurs in the Lilo Market in
both 2004 and 2010. To supplement to the interviews, we have exercised our own
observations about the market, the entrepreneurs therein, and whole Georgian economy to
clarify the matters of investigation.
3.1 Population, Sample, and the Collection of Data
Entrepreneurs in Georgia constitute the population of the research. Since it is unlikely
to contact to whole population, a sample was selected from the The Lilo Market in Georgia.
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The The Lilo Market, the open-air wholesale market, is the oldest and the largest market since
the independence of Georgian republic (DTZ Research, 2009, p.17). It is an important market
for the whole Georgian economy. The entrepreneurs in The Lilo Market represent one of the
oldest and multinational segments of Georgian population. Entrepreneurs in that market vary
in nations, ages, genders, and income levels. There are small-scale and medium-scale
enterprises, which do not produce but just trade. It represents a good snapshot of the evolution
of entrepreneurial skills in Georgia. That¶s why we have selected some of the entrepreneurs in
this market as the sample of the research.
The samples were based on the method of convenience sampling. All respondents
were interviewed face-to-face in the Georgian language. We interviewed 200 people both in
2004 and 2010. The interviewees were not the same. The interviewees were asked the same
questions in both years. Some features of the interviewees are as follows:
Gender: In 2004, 36% of the interviewees were female while 64% were male. In
2010, the percentage of female interviewees increased by 3% and reached 39% while the
percentage of male interviewees dropped to 61%.
Age: In 2004, 16% of the interviewees were more than 50 years old. 41% of them
were between 40 and 50 years old. 43 % of them were younger than 40 years old. In 2010,
18% of the interviewees were more than 50 years old. 40% of them were between 40 and 50
years old. 42% of them were younger than 40 years old. These figures both, for 2004 and
2010 show us that most of the interviewees have experienced both, the socialist and free
market systems. This suggests that they witnessed the repressive rules of Soviet system that
eroded their entrepreneurial skills, and the incentive rules of the free market system that have
enlivened them. Therefore, a substantial percentage of the interviewees were able to recognise
whether after the collapse of the Soviet system the business environment changed in favour of
themselves.
Nationality: In 2004, 42% of the interviewees were Georgians. 21% of them were
Azerbaijanians, 15% were Armenians. 22 % of the interviewees were of different nationalities
such as Kurdish, Russian. In 2010, 39% of the interviewees were Georgians. 22% of them
were Azerbaijanians, 17% were Armenians. 22% of the interviewees were of different
nationalities. It is apparently seen that a great majority of the interviewees were from former
Soviet states. To say it in other words, regarding the interpretation of their ages, most of them
experienced the socialist practices related to business life.
Income: In 2004, annual income of 16% of the interviewees was between $500 and
$5000. Annual income of 55% of the interviewees was between $5000 and $50000. Annual
income of 29% of the interviewees was more than $50000. In 2010, annual income of 14% of
the interviewees was between $500 and $5000. Annual income of 58% of the interviewees
was between $5000 and $50000. Annual income of 28% of the interviewees was more than
$50000.
3.2 The Barriers to the Development of Entrepreneurial Skills
Although Georgian government has launched many laws to transform the planned
economy into free market system, it is seen that there are still some problems that discourage
the entrepreneurs from trading, producing, investing, etc. In 2004 and 2010, we interviewed
some of the entrepreneurs from the Lilo Market to learn whether the business environment in
Georgia has changed in favour of the entrepreneurs; and whether they are still faced with any
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hindrance in business life, which are required to be removed for a better and fast recovery of
the entrepreneurial skills.
In 2004, 51% of the interviewees stated that they suffered from some taxation
problems while 13% of them stated that they suffered from financial problems, 32% faced
problems with customs. 4% of the interviewees stated that they dealt with some other
problems.
In 2010, 65% of the interviewees stated that they faced some financial problems while
5% of them suffered from taxation problems and 5% had problems referring to customs
practices and laws. 25% of the interviewees stated that they faced some other problems.
From the figures above, it is apparently seen that the entrepreneurs have experienced
nearly the same kind of problems with a change in order although six years passed from the
first interview date. The problems stated by the interviews, and our own observations are as
followings in detail:
1) Compared to the results of the interviews in 2004, the percentage of the
interviewees complaining about taxation problems reduced from 51% to 5%. This reduction
may be seen to indicate taxation problems that have been reduced relatively. In comparison to
the year of 2004, today, there are only 6 taxes out of 22 left in Georgia and tax rates have been
significantly reduced. Few taxes, low tax rates, simple taxation procedures have been levied
and taken in Georgia to reduce the taxation problems of the entrepreneurs. However, it is not
likely to say that all kinds of taxation problems have been solved. Entrepreneurs may
sometimes be faced with the harsh attitudes of taxation authorities; their stores may be closed
down or sealed up.2
2) Another obstacle for the Lilo Market entrepreneurs is related to practices and rules
of customs. All interviewees stated that they imported goods. In 2004, 44% of the
interviewees stated that they imported from Russia while the goods of 38% of interviewees
were imported from Turkey, 12% brought goods from China, and 6% took goods from other
countries. In 2010, 15% of the interviewees stated that they imported from Ukraine while 50%
imported from Turkey, 19% took goods from China, and 16% imported from other countries.
Compared the findings of the interviews in 2010 to those in 2004, it is seen that the
percentage of the interviewees suffering from customs practices has significantly decreased
from 32% to 5%. It is obvious that the reforms have turned out satisfactory and helped reduce
this problem to minimum. FTA (Free Trade Agreement) that was ratified on the 1st
of
November 2008 is one of these reforms. This agreement encouraged entrepreneurs to access
to new markets. Under our 2004 interview, most of the entrepreneurs importing from Turkey
were importing Turkish products through Azerbaijan due to high tariffs. However, as of 2010,
The Lilo Market entrepreneurs do not see laws and tariffs of customs as an obstacle to trade.
3) Under the findings of the interview of 2004 and 2010, the percentage of the
entrepreneurs suffering from financial problems has increased from 13% to 65%. On the other
hand, in 2004, 32% of the interviewees stated that they preferred to borrow from banks while
67% of them revealed that they preferred to use the sources of informal economy3
for their
financial needs. 1% of them stated that they had been waiting for good times. In 2010, 38% of
the interviewees preferred to borrow from banks while 51% of them revealed that they
preferred to use the sources of informal economy for their financial needs. 11% of the
2
For a sample case, please visit http://www.humanrights.ge/index.php?a=mainpid=12428lang=eng (accessed on 19 April 2011).
3
The informal economy is the part of an economy that is neither taxed nor monitored by any form of government. The production in that
market is not included in GNP. In developing countries, this economy or sector is the only way to earn a living for people who are self-
employed outside the formal economy. Most of them live and work in this sector because they have no chance to be hired by an employer
from the formal sector except for a few hours or days, with no legal right to be hired again.
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interviewees were waiting for good times. In 2010, most of those complaining about financial
problems stated that they suffered from the lack of financial resources. The main reasons
behind the lack of financial resources were, in fact, the war in South Ossetia and 2008 world
economic crisis. Secondly, the decline in using the sources of informal economy (from 67% to
51%) stems from the development of banking sector in Georgia. It has made it possible to get
credits with lower interest rates. However, a notable percentage of the respondents (51%) still
benefit from the sources of informal economy even though the banking sector has developed
and provides loans with low interest rates. A big majority of the interviewees stated that they
preferred the sources of informal economy since they found the prevailing interest rates of the
banks still very high and the procedure of credit line approvals very complicated and time-
consuming.
4) In 2004 and 2010, 4% and 25% of the interviewees respectively stated that they had
some other problems. These problems expressed by the interviewees and our observations
about the business environment in The Lilo Market and in Georgia are as follows:
Firstly, most of the entrepreneurs from this market have nearly no education about
entrepreneurship, and business life. They learn the rules of the business life by doing or
imitating their competitors, being unaware of even the basic management or economic
principles, and of the laws that affect their businesses. The Lilo Market entrepreneurs, and the
other entrepreneurs in Georgia are usually not able to respond to the essential questions of
³KRZ WR SURGXFH´ ³ZKDW WR SURGXFH´ DQG ³IRU ZKRP WR SURGXFH´ VLQFH WKH ODFN
professional skills to achieve it. Rapid changes in consumer demand also unable the
entrepreneurs to respond to the questions of what to produce or what to sell. The question of
for whom to produce is totally not considered by Lilo entrepreneurs. Training the
entrepreneurs and equipping them with professional education could be appropriate for the
development of their entrepreneurial skills.
Secondly, in Georgia, the trade of different kinds of products is subject to different
laws, which make the law system more complicated for the entrepreneurs. On the other hand,
entrepreneurs need many years to get accustomed to business environment in Georgia because
the laws regulating the Georgian business life change so frequently.
Thirdly, particularly the entrepreneurs who had undergone the soviet system were
usually afraid of responding to questions about their past, and their business activities because
such questions would have been asked by the governmental departments in Soviet times, and
those who had been found out acting against the Soviet rules would have been severely
punish. It shows that some of the entrepreneurs still do not feel the incentive power of
freedom for the development of their entrepreneurial skills.
Fourthly, the stores The Lilo Market entrepreneurs¶ trade in are not comfortable. These
stores have no roofs. Therefore, the weather conditions affect the quality of their products is
badly. To make matters worse, no organization cares about their problems.4
Besides the problems mentioned so far, the entrepreneurs stated that they have
experienced promising progresses in Georgia as well. The problem of bribery, a sinister
heritage of Soviet system to Georgia, was almost eliminated alongside with liberal reforms,
which makes doing business in Georgia more easy and more attractive. Legal paperwork to
set up a business is relatively easy and cheap. It can be done in about a month and costs
approximately a few hundred dollars. Another positive change in the Georgian business
4
It is to be noted that there began recently the construction of modern buildings.
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environment that was highlighted by most of the interviewees is that tax procedures have
become more liberal and easier.
The positive and negative views of the Lilo Market entrepreneurs about the business
environment in The Lilo Market do reflect the views of all entrepreneurs in Georgia about the
whole Georgian business environment since all entrepreneurs in Georgia, no matter in which
market they operate, do business under the same economic, social, cultural circumstances, and
laws related to taxation, customs, banking, and so on. Hence, it is possible to draw a
conclusion that the views of the sample reflect the views of almost all entrepreneurs in
Georgia, the population, about the Georgian business environment.
In addition to the mentioned barriers entrepreneurs are faced with, it seems that it is
inevitable for the entrepreneurs in Georgia to suffer from some other problems in the near
future. The findings of the interviews and particularly our observations about the
entrepreneurs in Georgia have proved that the Georgian economy is on the way to having the
homo economicus (economic man) capitalistic entrepreneurs of free market economies, the
behavioural features of whom cause some other problems. The model of economic man could
be expected to be a temporary solution in the post-Soviet countries for producing goods and
services meeting world standards. His productive hands might be expected to increase
production and contribute to the wealth and progress of the post-Soviet societies. However, it
is not definite that this expectation would always come true as some questions arise at that
point: Is the achievement of homo economicus to be the final target for Georgia or another
type of man must follow it? As a matter of fact, a clear criticism of economic man admittedly
comes from Adam Smith. He recognizes that self-interest appearing from the formation of
class identities effectively limits the possibilities of free trade and corrupts the institutions of
democratic government. He confesses that economic growth can be impeded by individuals,
classes, or nations that put their particular interests above the efficient workings of the market.
For example, in the case of monopolies, self-interest leads to the formation of groups that
impede the growth of all. On the other hand, the nineteenth and twentieth century¶s witnessed
numerous social and economic movements, and philosophies against the inequalities,
inhumanities, socially atomizing tendencies, and many other problems of the industrial
capitalism. These problems, as listed by Ben-Ner and Putterman (1997, p.8), also included
high levels of crime and violence, family instability, racial tensions and xenophobia,
seemingly intractable poverty and unemployment, self-destructive behaviours as drug abuse
and suicide, social disjuncture and depression, and widespread alienation among the young.
All these economic and social problems that economic man is alleged to cause
naturally harm the well-operation of the markets. Hence, the entrepreneurs in Georgia, who
seem on the way to becoming economic man, might harm the Georgian business life in the
future. To prevent the negative effects of Georgian economic men to occur and to have
reintegrating economics system established, there is a great need for a model of man who
balances between self-interest and social concerns, as the model of a Man of Society (Homo
Socieitus), and as Tomer (2001) writes, with both moral considerations and the left-behind
aspects of human nature. However, we don¶t turn a blind eye to the fact that mainstream
economics is doing well when it builds the discipline on the idea of economic man whose aim
is to maximize utility or profit, since both are the measures of success of the economic life.
The fact that the attempts to maximize profit or utility are prerequisites for the efficient use of
scarce resources on both sides of producers and consumers is also of importance. The model
of Man of Society does not ignore this positive and constructive aspect of economic man. He,
as a producer or consumer, is not independent of moral values. Together with being
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productive, he pays more interest to moral values than maximization of any economic interest
such as utility and profit. He is an altruistic man integrating economy with moral values and
balancing the individual interests with social concern and social responsibility, which
contributes to well-operation of the markets.5
3.3 Some Resolution Suggestions to Surmount the Barriers
Georgia is a small country with a total land area of about 70,000 square kilometres.
Although it has fertile areas for the agriculture, it seems unlikely that the Georgian economy
booms are based on agriculture because of its mostly mountainous topography. Therefore,
Georgia¶s future is dependent on the development of industry, and hence, human capital.
If we compare Georgia to other small but successful countries like Latvia, Singapore,
Switzerland, and Israel, we can see that they achieved economic progress by focusing heavily
on human capital. These countries managed to develop strong societies and economies by
improving education quality and reinforcing a culture of entrepreneurship. Today Georgian
republic tries to provide entrepreneurs with access to money and capital but this endeavour
will likely to fail if this capital is not accessed by skilled entrepreneurs. Georgian government
conducts reforms and tries to transform economy from the Soviet into a modern type but the
economic growth and transformation still depends and will be dependent on the availability of
skilled and educated entrepreneurs. If the society wants to develop and succeed alongside with
reforms in economic sphere that have recently taken place in Georgia, it is just the first step.
In order to be successful in the long run, investment for the population, improving education
quality and access, and reinforcing the culture of entrepreneurship are very important. In this
sense, the breadth and quality of Georgian education system will be vital.
A class of educated and skilful entrepreneurs is an essential requirement for a
sustainable economic development. Despite the Soviet Union had huge economic and human
resources, on which its vulnerable durability was based to a considerable extend, it could have
hardly survived longer than sixty years, mainly because it lacked a class of entrepreneurs who
could have freely combined and efficiently used these resources. Therefore, not only for the
transitional economies but also for all other less developed or developing economies an
entrepreneurial culture should be developed and a class of entrepreneurs should be trained.
Decentralizing the state, empowering its workforce, and encouraging entrepreneurship
through strong bankruptcy protection laws, stimulating risk-taking and innovation, helping to
cut barriers for access to capital for would-be entrepreneurs, prioritizing openness and the
freedom of information to the general population, developing a truly independent media, a
transparent government, and a credible system of meritocracy are all other related factors to
develop an entrepreneurial culture in addition to education. Entrepreneurial culture must
consist of sets of values, beliefs, attitudes and norms of behaviour which underpin a role
model of success in society via individual or collective entrepreneurial endeavour.
The educational context should be that of preparing people for a flexible labour market
in recognition that young people would no longer be guaranteed a job as was the case in the
5
For detailed information about the model of man of society, please refer to the following articles and the proceedLQJg]VRøVPDLO
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old educational structures where the students were guaranteed a job in the industry or
company in which they had learnt the business. Different models of school-industry linkages
should be established in order to replace those of the old regimes. Besides, an awareness and
capability of how to use the skills in self-employment should be developed in young people so
that one in five or six people may ultimately end up with their own business, that being a fact
in a market economy. Curricula should include economics, sociology, psychology, history,
geography and mathematics, and should offer a greater scope of subjects for the development
of personal skills and acquisition of knowledge in an entrepreneurial manner. Teaching should
concentrate on µknow-how¶ and µknow- who¶ and an understanding of the business processes
generating µthe need to know¶. Besides, it should include the ethics as well. It should teach
how beneficial it is not to care about personal interest only, but to give priority to the
maximization of common interest, which will help for the emergence of man of society.
The need for qualified public officers who are well aware of the importance of the
entrepreneurs in the development of an economy is unquestionable. Many entrepreneurs from
the Lilo Market complained about the harsh attitudes of the tax officers in particular. It is
unlikely to determine the borders of the approaches of the officers to entrepreneurs by law.
The officers should be trained about how to perform their duties without discouraging the
prospective and the current entrepreneurs to do business in Georgia.
Conclusions
Land, labour, and capital as the means of production in an economy have to be
combined efficiently to produce goods and services. This necessity requires for another means
of production, namely, entrepreneur. As was the instance of former socialist countries such as
Georgia a sustainable development may never be completed without a class of entrepreneurs
to combine these resources, and take the risk of profit or loss.
Georgia has been experiencing a rapid transformation since the fall of the Soviet
system in 1991. Since then it has launched many laws to transit from a planned economy into
a democratic and free market system. It has cut considerably long way towards the market
economy. The private ownership and private enterprises have sharply overweighed the public
ownership and public enterprises. All business activities have been largely liberalized.
Enterprises and households make their own economic decisions freely. Market supply and
demand are the deterministic forces in setting and stabilizing the price and production levels.
To sum up, free market exists and has been developing gradually in Georgia.
Under the circumstances of such a transitional economy, entrepreneurial skills have
also evolved from Soviet man into a more contemporary one. In the Soviet times, the
entrepreneurial skills were diminished and misdirected. The Soviet man was deprived of the
liberty of free enterprise. A new type of man, µhomo transformaticus¶, followed the Soviet
man towards the end of the Soviet era. This man had the characteristics of both, the Soviet
man and the economic man. At present the economic man, the typical man of market
economies, can be said to have been born in Georgia for many businessmen can build their
own business, produce, and buy, export and import all kinds of goods and services on their
behalf.
However, despite the increasing liberty in the Georgian economy, the entrepreneurs in
Georgia have been still faced with some economic, legal, cultural, educational problems,
which retard the development of their entrepreneurial abilities. According to the interviews we
had with some of the entrepreneurs in the Georgian Lilo Market both in 2004 and 2010, our
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own observations about the market, the entrepreneurs therein, and the whole Georgian
economy, the entrepreneurial skills of businessmen in Georgian economy have been in
progress. In spite of the above categorized barriers, they are able to perform many economic
activities they would not have been able to and they even had not known how to under
socialist rules. In addition to decentralizing the state, empowering its workforce, encouraging
entrepreneurship through strong bankruptcy protection laws, stimulating risk-taking and
innovation, helping to cut barriers for access to capital for would-be entrepreneurs,
prioritizing openness and the freedom of information to the general population, developing a
truly independent media, a transparent government, and a credible system of meritocracy,
simplifying the legal issues the entrepreneurs have to obey, decreasing the tax and interest
rates, the main precaution the Georgian government should take is to invest in human capital
much more. A class of educated and skilful entrepreneurs and labourers is the essential
requirement for the sustainable development of the Georgian economy. In this sense, the
breadth and quality of Georgian education system will be vital. The educational context
should not only include the teaching of positive sciences. It should relate to moral values and
ethics as well since raising the prospective though socially unconcerned entrepreneurs and
labourers as economic man will inevitably cause Georgia to experience the problems of other
free market economies, which are alleged to happen due to the behavioural features of
economic man. Thus, Georgia needs a model of man which balances between self-interest and
social concerns, the model of a man of society.
Man of society is one who spends out of what he earns/owns on others as well as on
him and his family members. As composed of both body and spirit, needs and pleasures of
man are both physical and spiritual. The main source of spiritual utility or happiness is
sharing some of whatever you have with those not having it. A bodily satisfied man of society
who spends some of his income on others is as rational as, even more than, a selfish economic
man since spiritual pleasure is never ending while bodily ones have a limit. In the model,
diminishing marginal bodily utility gives way to spending on others, thus giving non-ending
spiritual pleasure. Man of society helps maximize welfare and happiness both on individual
and social levels by giving way to optimal allocation of wealth between bodily and spiritual
needs as well as by transferring it from the rich to the needy. So, the motto of the model of
man of society is ³OLYHDQGOHWOLYH´. Since everybody helps others this or that way, everybody
is potentially man of society Man of society is economically efficient in production and
exchange, and benevolent in spending on people around him. Since it integrates economy
with society, the model of man of society can be considered a remedy to eliminate the
limitations of the free market system such as income inequality, public goods, externalities,
and economic instabilities. So, it can be said that not only Georgia but also all societies need
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