Public debt and economic growth in small countries under contemporary challenges

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Ivane Javakhishvili Tbilisi State University Paata Gugushvili Institute of Economics
In the conditions of modern dynamic global processes, revealing the peculiarities of small countries and their reflection in the context of promoting the country's socio-economic development and ensuring macroeconomic stability is of particular importance. Small countries are distinguished by the presence of relatively different mechanisms of the functioning and development of the corresponding socio-economic systems, which naturally requires the consideration of the mentioned fact when considering individual economic problems. The role of the socio-economic systems of small countries is increasing in the light of new challenges and today's confrontational globalization, when the issue of the country's sustainability, the topic of economic security and the need to effectively implement various anti-crisis economic mechanisms gain importance. The analysis of gross domestic product in the retrospective period of the economies of small countries shows that their dynamics are heterogeneous. It is worth noting that the response and downturn of the economies of small countries during the COVID-19 pandemic has been to varying degrees, as well as the recovery of economic systems in recent years. According to the change of public debt in the same analysis period, small countries also stand out from each other with a different picture. If we look at the change in public debt over time, it is clearly seen to increase in the first years of the COVID-19 pandemic, albeit with a different size by country. This is due to the specifics of the government support packages for the population of these countries and the non-uniform concepts and institutional provision of state spending to stimulate the respective economies. In the process of analyzing the dynamics of foreign direct investments, more differences are noticeable between small countries, which can be explained both by the different investment attractiveness of individual countries, and by existing problems and challenges of a global nature. Following the decline in economic activity during the COVID-19 pandemic, the slowdown in economic growth and development worldwide has become alarming. Countries were faced with the need to take on large public debt, which further aggravated the economic environment. The pandemic clearly showed us that even developed countries were not ready for an event of this magnitude. History remembers the Great Depression, remembers other less important crises, such as, for example, the crisis of 2008-2009. However, the coronavirus pandemic has made it clear that we are dealing with an entirely new type of crisis. The effects of the pandemic are clearly visible in all three indicators of all the countries we selected. In 2020, when the coronavirus was at its peak, absolutely every country had problems maintaining economic growth. In general, the following scenario would be expected: in the wake of the pandemic, the rate of economic growth would decrease, as economic activity underwent a rather strong transformation. And we know that the initial stages of transformation are characterized by recession, economic failures, and other problems. Accordingly, we assumed that the pandemic slowed economic growth in the countries. Similarly, foreign direct investments would also decrease. It is important to note here that investors would avoid investing due to such force majeure. Therefore, it is logical to expect a decrease in investment flows. We have the opposite picture in relation to public debt. When the mechanism of functioning of the economy is disrupted, it is difficult to establish stability with existing policies. It becomes necessary to take on debt to compensate for the losses that will follow the crisis. That is why it is completely logical that the public debt of all countries increased significantly during the coronavirus period. However, it must be noted that the coronavirus affected countries differently in terms of the extent of damage. This, of course, was caused by the differences between the countries' economies and the peculiarities of their socio-economic systems. Analysis and research of the period of the COVID-19 pandemic showed us that the peculiarities of small countries are significantly manifested in the specifics of the changes and interactions of economic growth, public debt, and foreign direct investment in crisis situations. At the same time, the role of the socio-economic systems of small countries is increasing in the light of new challenges and today's confrontational globalization, when the issue of the country's stability, the topic of economic security, and the need to effectively implement various anti-crisis economic mechanisms are vitally important. The study also showed that autoregressive distributed lag (ADRL) and vector autoregressive (VAR) models can be used in the analysis of economic growth, public debt, and foreign direct investment and in the formation of relevant macroeconomic policies. | თანამედროვე გლობალური გამოწვევების პირობებში განსაკუთრებულ მნიშვნელობას იძენს მცირე ქვეყნების ბრობლემატიკა. ამასთან მიმართებით აქტუალურია მათი ეკონომიკების თავისებურებების გამოვლენა და ასახვა ეკონომიკური პოლიტიკის შემუშავების და რეალიზაციის პროცესში. მცირე ქვეყნების სპეციფიკის გათვალისწინება ფრიად მნიშვნელოვანია მათი სოციალურ-ეკონომიკური განვითარების, კრიზისულ სიტუაციებში მაკროეკონომიკური სტაბილურობის უზრუნველ- ყოფის კონტექსტით. პირველ რიგში, გასათვალისწინებელია, რომ მცირე ქვეყნები გამოირჩევიან მათი სოციალურ-ეკონომიკური სისტემების ფუნქციონირების და განვითარების შედარებით განსხვავებული მექანიზმების არსებობით, რაც, ბუნებრივია, მოითხოვს ცალკეული ეკონომიკური პრობლემების განხილვისას აღნიშნული ფაქტის გათვალისწინებას. COVID-19-ის პანდემიამ გამოავლინა მცირე ქვეყნებთან მიმართებით ეკონომიკური ვარდნის, სახელმწიფო ვალის ზრდის და უცხოური პირდაპირი ინვესტიციების მოზიდვის პრობლემების სიმწვავე. წინამდებარე კვლევის მიზანს წარმოადგენს მცირე ქვეყნებში ზემოაღნიშნული პრობლემების და ეკონომიკური ზრდის სისტემური ანალიზი, რაოდენობრივი ურთიერთმიმართების გამოვლენით.
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Ekonomisti, Volume XIX, №1, 2023, pp. 98-110