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A blog about economics in the South Caucasus by ISET

Bread Should Be Baked By the Baker!

"Sixty-Eight Million Dollars Were Given for Colleges Last Year: – if  the Mania for College Education Continues We May Soon Expect the Above State of Affairs"

American and Western European visitors to Georgia are fascinated by the fact that middle-aged Georgian taxi drivers often brandish a couple of engineering degrees, while young hotel receptionists and shop assistants frequently come with law, business and international relations education. Having spent a couple of days in Tbilisi, visitors may come to imagine that Georgia is so abundant in human capital that entry into these fairly undemanding occupations is extremely competitive. After a month of trying to set up a business, however, one would inevitably discover that nothing could be further away from the truth.

The truth is that Georgia’s labor market is a nightmare for Georgian employers and job seekers alike. “Inadequately educated workforce” is widely considered to be the number one inhibiting factor for doing business in Georgia. For example, this is a key finding of the 2016-17 Global Competitiveness Report (GCR, see chart below). According to GCR, Georgia has had tremendous success in fighting crime and corruption, but is yet to educate its labor force.

The World Bank’s “Workforce Skills in the Eyes of the Employers” (November 2013) documents the misery of Georgian businesses (particularly, construction companies) when it comes to hiring. According to the World Bank’s survey, the problem is not a lack of education per se (on paper, Georgia’s workforce is very well educated), but inadequate education, education that “fails to equip young workers not only with technical skills but also with higher order cognitive skills, and some critical socio-behavioral skills.”

Inadequately educated force is ranked first among factors inhibiting Georgian businesses, according to the Global Competitiveness Report’s Executive Opinion Survey 2016

A well-known flip side of the problem is the great difficulty of educated workers to find jobs. Georgia doesn’t have a particularly high official unemployment rate (about 12% in 2015), but many of the unemployed – almost every second person in urban areas – have a university degree! Moreover, many of the educated Georgians are forced to take jobs well below their (formal) qualification – as taxi drivers, receptionists, shop assistants, etc.

 

On the one hand, this over-education phenomenon may reflect the traditional structure of the Georgian economy. According to the same WB study, Georgia’s demand for highly skilled labor is very low when it comes to new hires. In 2012 (the latest year for which such data are available), about 75 percent of all new hires were blue collar workers (unskilled and skilled), while only 12 percent were professionals or technicians.

On the other hand, many Georgian university graduates don’t have the cognitive skills and personality traits to effectively compete for jobs in the small modern segment of the economy, populated by technologically advanced and internationally-connected firms. As reflected in the WB data, the latter require “higher order cognitive skills (problem solving, critical thinking and creativity)” which (too) many Georgian university graduates lack.

Now, while there is little we can do (certainly in the short run) about the traditional structure of the economy, something should be said and done about the educational choices of Georgian youth. Why would someone lacking in “problem solving, critical thinking and creativity” opt for a higher education degree? Would it not be in the interest of such individuals to be trained for occupations in which they could actually excel?


WHY DO WE NEED (SOME MANY) UNIVERSITY DEGREES AND DIPLOMAS?

Universities do not only educate students. They also filter applicants, test their abilities, and certify their professional qualifications, providing important information for the labor market. Resumes of Harvard graduates are promoted to the top of the pile because the labor market believes that Harvard does exceptionally well in performing all four functions: filtering, teaching, testing, and certifying. A Harvard diploma is thus a useful signaling device: I am smart (Harvard accepted me), hard-working (I survived), and well-educated (I graduated from Harvard, didn’t I?).

Back in 1991, Tbilisi State University was the only Georgian institution providing economics education. Of course, the Soviet version of “economics” was only remotely related to economics as we know it today. Yet, TSU economics faculty was considered an elite institution, and less than 250 young men and women were fortunate to be admitted to its three departments every year. Soviet economics education was not great – a bit of mathematics and statistics under a thick layer of Soviet planning and Leninist-Marxist dogma – but TSU students were the cream of the crop, and TSU diploma was a strong signal of excellence – of academic ability, leadership skills, and social capital.

The situation changed quite dramatically in the 1990s. Corrupted to the bone, the education system stopped performing any socially useful functions. Teachers did not teach. Universities did not filter applicants, did not test their abilities, and did not credibly certify their skills and knowledge. They only took their money in return for a meaningless piece of paper.

Paradoxically, however, university enrolment skyrocketed as getting a modestly priced piece of paper was considered better than getting none at all. In 2005, a turning point in Georgian education history, almost 47% Georgia’s 18-21 year olds were “studying” in a private or public “university”, preparing themselves for life abroad, or long unemployment spells and shop assistant jobs at home.

Even more paradoxically, the situation did not much improve – as far as quality is concerned – after the sweeping reforms of 2005. In that year, Georgia revoked the licenses of dozens of “universities”, including many village establishments (so-called “orghobis universities”), and introduced nationally-administered tests which set a (very low) cognitive quality threshold for university enrolment. The new National Assessment and Examination Center (NAEC) thus took upon itself the (crude) filtering function, which was the key to eliminating corruption in university admissions. Still, it remained up to self-governed universities to set higher quality bars and establish rigorous testing and certification systems. None of that happened. Given short-term funding incentives, Georgian universities only care about increasing the number of tuition-paying students: not about their brand and reputation, and certainly not about the quality of labor market signals they are providing.

The number of Georgian students in higher education programs went down from the peak of more than 170 thousands in 2004-5 to about 95 thousand in 2008-9, but has been steadily rising ever since, reaching more than 140 thousand in 2016-17. Today, practically any high school graduate whose score on NAEC’s tests is above a very low minimum, opts for a low-cost and low-effort university diploma.


GEORGIAN HIGHER EDUCATION MARKET AS A CASINO

The pooling of Georgian youth into low-quality higher education programs calls for an explanation. A key point we would like to make is that such behavior is individually rational under the current circumstances, and, unless these circumstances change, we can expect people to continue to make poor choices.

First, diplomas are nowadays looked upon with grave suspicion; few, if any, hiring decisions are made on the basis of formal VET or university attainment. Yet, the cost of acquiring education has also become very low, encouraging low-ability candidates to acquire a piece of paper “certifying” their superior credentials:

• To begin with, tuition fees are currently set – for populistic reasons – at 2,250 lari (less than 1,000 USD) per academic year at all public universities. While fully or partially waived for a certain proportion of top scorers on the NAEC test, this level of (regulated) tuition is in any case too low to deter low-ability candidates from buying university diplomas.

• Further, the opportunity cost of acquiring tertiary education – measured in terms of foregone income and work experience – is also very low in Georgia. The majority of students maintain full time employment starting with the second or third year of studies. Some universities further reduce the opportunity cost of diploma buyers by allowing students who are working full time to skip classes, and to retake exams.

• Finally, buying a diploma requires very little effort, even on the part of low-skill individuals. Exams and assignments are poorly administered, resulting in rampant cheating. A passing grade can be achieved by merely attending seminars.

Second, while not a sufficient condition for getting a decent job, a higher education diploma is very often essential (necessary) for a candidate to be invited to a job interview. Having a diploma certainly does not impress anybody in a society where every second person has one (or even two). But not having a higher education diploma has a strong stigmatizing effect equivalent to signaling that you belong into the bottom half of the ability distribution, resulting in lower chances of getting hired and lower wages. In other words, it is like telling your future employer: I was a lazy high school student and failed to achieve the (very low) minimum score on the NAEC test.

Third, Georgia’s education system lacks a credible VET component. The vast majority of existing colleges attract very low quality candidates, further reinforcing their poor reputation with potential future students and employers. VET teachers, in most cases, lack real industry experience. Private sector linkages, while declared as an important policy objective, are rarely strong. As a result, VET programs and pedagogy are thoroughly outdated, not providing a viable alternative to equally poor university education.

The signaling game played in Georgia’s education market generates a very bad pooling equilibrium.

Given the earnings premium associated with higher education and the low cost of acquiring it, Georgian youth flock into universities in an effort to “signal” higher quality in the labor market. For the majority of low-skill candidates, many of whom could have excelled in occupations that do not require “higher order cognitive skills”, the gamble on higher education does not pay off. They end up not acquiring any qualification, simply wasting a little bit of time and money.

Importantly, efficiency losses associated with the existence of “degree inflation” – a situation when diplomas lose their value – far exceed these private costs. The Georgian education casino reduces the quality of information available to employers, and lowers their appetite for immediate hiring decisions. Given the increased risk of mistakes, businesses are forced to reduce wages for potentially qualified candidates, and have to rely on costly screening mechanisms, such as long unpaid internships, and nepotistic connections. (See also Thing 17 of Ha-Joon Chang’s 23 Things They Don’t Tell You About Capitalism)


SYSTEMIC PROBLEMS REQUIRE SYSTEMIC SOLUTIONS

The alternative to a bad pooling equilibrium, in which too many people go for university degrees, is called separating equilibrium. The latter corresponds to a situation when only high-skill individuals find it beneficial to enroll in universities, while others opt for alternatives such as technical and vocational education and training (TVET). At least in principle, government regulations could be redesigned so as to nudge people into correct educational and occupational choices. The challenge is to approach this with a systemic view in mind. Fixing one element of the puzzle (e.g. reducing corruption or developing better VET standards) will not do the trick. What is needed is a multi-pronged approach based on sound economics.

• Make the acquisition of public university degrees somewhat more difficult and costly for low-skill candidates. For example, increase the minimum score requirements on the NAEC-administered Unified National Exam and increase regulated tuition fees (this will not affect high-skill candidates eligible for government scholarships).

• Eliminate the wrong reasons to acquire an education (e.g. to avoid or defer military conscription).

• Weed out weak universities (does Georgia need 20 public and 54 private universities?) through a combination of stricter quality requirements, better monitoring, and increasing the system’s transparency (e.g. through “rate my professor”, “rate my program” and “rate my university” online platforms).

• Change the funding mechanism of public universities, strengthening their incentives to invest in the quality of faculty and programs, on the one hand, and compete for the best students (as opposed to any students), on the other.

• Create strong incentives for leading private sector actors to enter the TVET market, establish new and rebrand existing private TVET colleges. This could take the form of sectoral coordination, co-financing (through Public Private Partnerships), as well as help with tedious licensing, authorization and accreditation requirements.

*     *     *

In 2013, about 35% of Georgian youth (age group of 15-29) neither worked nor were involved in any further education or training activities. Leaving so many of Georgia’s sons and daughters behind is clearly not compatible with the country’s development goals. Yet, as long as systemic education reforms are delayed by powerful lobbies and bureaucratic inertia, Georgia’s education system will continue to be stuck in a vicious circle of low quality ‘over-education’. Free of corruption, but failing to address pressing labor market needs.


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Florian Biermann on Wednesday, 19 April 2017 18:35

Ok, the situation is dire, but what do you expect in a country with $4,000 per capita income? One should compare the situation in Georgia with other countries which have similar income (which could be the topic of another blog article), and I am not sure that Georgia would perform so badly in such a comparison. At least, people in Georgia have degrees at all (in fact: too many) and they have learned something, and, most importantly, they appreciate being literate. All of this is not a matter of course.

One should not expect to have world class universities in a poor country. The fact that Georgian universities attract some foreign students is in fact quite impressive and shows that the country is doing better than, for example, India and other source destinations.

Finally, while the misery is analyzed well, the proposed solutions do not promise to solve the issues. There may be bad educational choices, but in the end, the quality of education is largely a matter of how much money is available. Give me enough money and I would create 1, 5 or even 20 Georgian Harvards!

Ok, the situation is dire, but what do you expect in a country with $4,000 per capita income? One should compare the situation in Georgia with other countries which have similar income (which could be the topic of another blog article), and I am not sure that Georgia would perform so badly in such a comparison. At least, people in Georgia have degrees at all (in fact: too many) and they have learned something, and, most importantly, they appreciate being literate. All of this is not a matter of course. One should not expect to have world class universities in a poor country. The fact that Georgian universities attract some foreign students is in fact quite impressive and shows that the country is doing better than, for example, India and other source destinations. Finally, while the misery is analyzed well, the proposed solutions do not promise to solve the issues. There may be bad educational choices, but in the end, the quality of education is largely a matter of how much money is available. Give me enough money and I would create 1, 5 or even 20 Georgian Harvards!
Eric Livny on Wednesday, 19 April 2017 19:32

I strongly disagree with your last paragraph, Florian. Indeed, money and (you should have added) human resources are particularly scarce in poor developing countries. Thus, one has to make sure that (1) money is used efficiently and effectively and (2) people are helped to make better educational choices. And this is precisely what this article is all about. Saying that only money can solve this problem is not an answer I would expect from an economist.

In fact, it is very easy to show that money is not the real bottleneck. Just look at countries with similar GDP per capita. Estonias GDP per capita is not significantly different than that of its European peers, and yet it achieves much better educational outcomes because it has a better institutional setup. Cuba is by all means very poor, but it is exporting human capital and education to the rest of Latin America (and even Africa, if I am not mistaken).

I strongly disagree with your last paragraph, Florian. Indeed, money and (you should have added) human resources are particularly scarce in poor developing countries. Thus, one has to make sure that (1) money is used efficiently and effectively and (2) people are helped to make better educational choices. And this is precisely what this article is all about. Saying that only money can solve this problem is not an answer I would expect from an economist. In fact, it is very easy to show that money is not the real bottleneck. Just look at countries with similar GDP per capita. Estonias GDP per capita is not significantly different than that of its European peers, and yet it achieves much better educational outcomes because it has a better institutional setup. Cuba is by all means very poor, but it is exporting human capital and education to the rest of Latin America (and even Africa, if I am not mistaken).
Simon Appleby on Wednesday, 19 April 2017 18:59

One issue not discussed in the issue of military conscription. Suspended midway through last year, it was reinstated in November

http://georgiatoday.ge/news/5092/Georgia’s-Defense-Ministry-Restores-Compulsory-Military-Conscription

Attendance at a university is one means of avoiding National Service in Georgia. In a country where military service is traditionally highly prestigious (Israel), or additionally a pathway to success for people from low income backgrounds or ethnic minorities (USA, Australia, UK) , it would not have such a big effect on the demand for university entrance. In Georgia, where past problems with military bastardisation and low pay still live on in peoples minds, families will pay for education their sons dont need to keep them safe from imaginary harm while serving as conscripts.

The Ministry of Defence is making progress in the professionalisation of the Services so that soldiers are technically very well trained and have sound problem solving skills, as well as rooting out physical and mental abuse of conscripts, but the message is not getting through to the populace. A local equivalent of a GI Bill, offering a fully paid degree course, apprenticeship, or a fully equipped 10 Ha block of farmland for all servicemen serving a three-year term, might sweeten the pot such that military service is seen as less unattractive, and conscription less necessary outside times of war.

One issue not discussed in the issue of military conscription. Suspended midway through last year, it was reinstated in November http://georgiatoday.ge/news/5092/Georgia’s-Defense-Ministry-Restores-Compulsory-Military-Conscription Attendance at a university is one means of avoiding National Service in Georgia. In a country where military service is traditionally highly prestigious (Israel), or additionally a pathway to success for people from low income backgrounds or ethnic minorities (USA, Australia, UK) , it would not have such a big effect on the demand for university entrance. In Georgia, where past problems with military bastardisation and low pay still live on in peoples minds, families will pay for education their sons dont need to keep them safe from imaginary harm while serving as conscripts. The Ministry of Defence is making progress in the professionalisation of the Services so that soldiers are technically very well trained and have sound problem solving skills, as well as rooting out physical and mental abuse of conscripts, but the message is not getting through to the populace. A local equivalent of a GI Bill, offering a fully paid degree course, apprenticeship, or a fully equipped 10 Ha block of farmland for all servicemen serving a three-year term, might sweeten the pot such that military service is seen as less unattractive, and conscription less necessary outside times of war.
Eric Livny on Wednesday, 19 April 2017 19:16

Simon, thanks for your comment. First, I could not agree more. We actually do mention the current system of military conscription as an issue. We recommend to

eliminate the wrong reasons to acquire an education (e.g. to avoid or defer military conscription).
We dont provide any more detail, but actually we discuss this whole issue in a separate article
On Education and the Sacred Duty of Defending One’s Motherland
(http://iset-pi.ge/index.php/en/iset-economist-blog-2/entry/on-education-and-the-sacred-duty-of-defending-one-s-motherland). That article starts with a absurd example young Georgians (graduates of ISETs Economics MA program graduates) pretending to study (getting another degree) at the Georgian Technical University in order to further defer their military conscription. Whats even more absurd is that GTU is receiving public funding for pretending to teach them.

Simon, thanks for your comment. First, I could not agree more. We actually do mention the current system of military conscription as an issue. We recommend to [quote]eliminate the wrong reasons to acquire an education (e.g. to avoid or defer military conscription).[/quote] We dont provide any more detail, but actually we discuss this whole issue in a separate article [quote]On Education and the Sacred Duty of Defending One’s Motherland[/quote] (http://iset-pi.ge/index.php/en/iset-economist-blog-2/entry/on-education-and-the-sacred-duty-of-defending-one-s-motherland). That article starts with a absurd example young Georgians (graduates of ISETs Economics MA program graduates) pretending to study (getting another degree) at the Georgian Technical University in order to further defer their military conscription. Whats even more absurd is that GTU is receiving public funding for pretending to teach them.
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