ISET

ISET Economist Blog

A blog about economics in the South Caucasus.

Georgian and Armenian “Deplorables” and "Desperados" Taking It to the Streets

Georgian and Armenian ruling parties have been until recently basking in the glory of high GDP growth rates. Armenia’s stellar growth performance of 7.5% in 2017 and Georgia’s respectable 5% are, indeed, worthy of praise. However, do these figures really matter for the objective well-being of the majority of Georgians and Armenians? Second, how does economic growth, as measured by GDP, affect people’s subjective perception of happiness? Third, what does it do to crime rates and people’s appetite for political representation, social justice and fairness?


THE THEORY AND PRACTICE OF TRICKLE-DOWN ECONOMICS

A belief traditionally held by liberal economic thinkers and ideologues is that wealth tends to ‘trickle down’ from the upper echelons of society to the lower classes. The implication of this trickle-down proposition is that economic growth benefits everybody by increasing the overall size of the pie. Yes, the entrepreneurial class may be the first to benefit from expanded business opportunities, but more business (and businesses) also means more jobs, and more income redistributed to the poor – directly, through taxes and social transfers, and indirectly, through better financed public education and healthcare systems. Economic growth thus helps reduce the absolute level of poverty in a society.

The ‘trickle-down’ theory makes a lot of sense … in theory. Whether it actually works in practice depends on a few important nuances. First, if economic growth is generated in just a few capital-intensive sectors of the economy, such as Azerbaijan’s oil and gas sector, it is likely to create relatively few jobs. Moreover, these new jobs may not be suitable for the uneducated and unskilled urban and rural poor. Second, economic growth certainly increases the amount of taxable income in an economy, but whether and when the extra tax revenues will benefit the poor depends on a country’s political priorities. At one extreme, the government may choose to increase social pensions; at another, it may increase public spending on defense or reduce the tax rate on businesses (so as to encourage investment and future growth).

At least for a while, Georgia’s economic growth has been accompanied by a reduction in extreme poverty. First, Georgia’s economic growth in 2013-14 was primarily driven by labor intensive sectors – tourism, trade and traditional agriculture. Second, and even more importantly for poverty reduction, since early 2013, Georgia has been actively implementing a wide range of redistribution policies – from universal healthcare coverage and free preschool education to increased targeted social assistance (TSA) and pensions.

In more recent years, however, social benefits did not keep up with inflation, erasing earlier gains in the battle against poverty. Using consumption expenditure data, UNICEF assesses that the share of general population below the extreme poverty line (consuming below the 1.25 USD per day threshold) more than doubled in 2015-2017, from 2.1 to 5%. Particularly worrying is the sharp increase in the share of children growing in extreme poverty – from 2.5% to 6.8%.

Thus, at least in Georgia’s case, economic growth failed to trickle down in a sustained fashion, resulting not only in higher absolute poverty, but also in a growing sense of unhappiness and frustration with the country’s economic and political direction.


ECONOMIC GROWTH, INEQUALITY AND HAPPINESS

There is a fairly broad consensus in the social science literature, as discussed in a recent CityLab piece, that even when some of the wealth created in the process of economic growth does trickle down, money alone does not make people happy. For example, a study by Shigehiro Oishi (University of Virginia) and Selin Kesebir (London Business School) finds that happiness (“subjective well-being”) in 16 developed countries is correlated positively with GDP per capita and negatively with income inequality (measured by the Gini coefficient). Much more surprisingly, when looking at 18 less-developed Latin American economies, Oishi and Kesebir find that not only inequality tends to dampen happiness, but – in contrast to advanced nations, – happiness does not increase alongside economic growth.

What can explain the fact that economic growth cannot buy happiness in the less-developed Latin American nations? One reason may be the very high initial levels of inequality in Latin American societies, and the failure of their political systems to make sure that a fair share of newly created wealth trickles down fast enough to the poor masses.

When it comes to income inequality, Georgia and Armenia do more or less fine relative to their level of development. As reported by the World Bank, the level of income inequality in Georgia and Armenia (Gini coefficients of 38.5 and 32.4 in 2015, respectively) is much lower than in African, Asian and Latin American societies divided by caste, clan and race (the most unequal societies, such as South African Republic and Haiti, have Gini coefficients above 60). As could be expected, however, Georgia and Armenia are quite a bit less equal than some of the wealthiest and most egalitarian societies of the world, such as Finland and Iceland, with Gini coefficients around 25.

However, what is important in the context of subjective well-being and happiness is not the absolute degree of income inequality, but how people in a society feel about it. For one, people’s perceptions of existing social and economic disparities may be determined by cultural factors (one may argue that Nordic people tend to place a higher value on social solidarity, whereas caste-based societies tend to accept inequality as a given, reflecting the will of God). Additionally, perceptions are affected by the speed with which social gaps are closed (or not) through the political system. Stagnation or slow progress in addressing social disparities is likely to generate frustration, desperation, anti-social or radical political behaviors, as we have recently observed in both Georgia and Armenia.


(UN)HAPPINESS, DESPERATION, AND POLITICAL ACTION

For all their differences, Georgians and Armenians share much in common. Both are small ancient nations that survived through centuries of imperial domination and conquest. Both proudly embraced independence 100 years ago and, again, in early 1990s. And both are seriously unhappy with the current state of their political institutions.

Out of 156 countries included in UN’s World Happiness Report 2018, Georgia and Armenia have been ranked 128th and 129th, only a few notches ahead of war-and-corruption torn Ukraine (138th) and not very far from Africa’s failed states at the very bottom of the ranking: Burundi, Central African Republic, South Sudan, Tanzania, Yemen and Rwanda. Not surprisingly, the happiest five nations in the world are those that place social harmony and fairness on par with individual success: Finland; Norway, Denmark, Iceland and Switzerland.

Importantly, unhappiness and readiness to act are strongly related to a perceived lack of social justice. It is not so much about being poor, but the fact that government ministers are driven around in very nice cars that you will never be able to afford; the fact that your children will never have the chance to acquire a decent education; the fact that the guy next door is somehow above the law or is able to get special treatment from the courts, the law enforcement agencies, and the political system.

Societies undoubtedly differ in the degree of social injustice they can acquiesce without putting up organized resistance. And if there is something the Georgian and Armenian people really share in common it is the very little degree of patience they have for their rulers. Judging by recent events in both countries, the two people have clearly had enough.

Armenian people’s success in bringing down a corrupt regime is truly inspiring. An unprecedented wave of solidarity swept through the entire society, manifesting itself in civil disobedience acts and protests cutting across Armenia’s geography and social classes. Restoring social solidarity appears to be at tje top of Nikol Pashinyan’s priorities and his vision for Armenia’s Velvet Revolution: “healthier institutions, less corruption, fair pay, stronger regulation, better education, advancement for all.”

The eagerness with which thousands of people have been gathering in Tbilisi’s Rustaveli Avenue to protest perceived injustices suggests that Georgia’s “deplorables” and “desperados” have also reached a point of no return.

Unlike Armenia, corruption may not be Georgia’s main concern. However, the Georgian people appear to be fed up with being ruled by dominant parties and powerful individuals enjoying a near-monopolistic status in the country’s political arena. This objective weakness of Georgia’s political system and the country’s fundamental inability to address persistent social gaps appear to be at the root of the current crisis.

*     *     *

Giorgi Kvirikashvili was one of the finest prime ministers in Georgia’s modern history, and his departure will not help tackle any of Georgia’s challenges. If anything, the manner in which Kvirikashvili was thrown under the bus serves to illustrate Georgia’s weakness as a democratic polity and the urgent need for political and economic reforms going beyond PR and the quick ease-of-doing-business fixes. 


See our article usage guidelines 

Rate this blog entry:
6 Comments

Related Posts

Comments

 
Guest - Ani on Thursday, 21 June 2018 00:51

It is interesting to mention about the little degree of patience of Armenians for their rulers, while they could tolerate the same regime for over two decades, meanwhile Georgia overthrew its rulers and cleared up the system third time after its independence. For sure, the Azerbaijan is the the first in terms of patient for its rulers category in the region.

PS. Armenias economic growth was certainly not impressive.

It is interesting to mention about the little degree of patience of Armenians for their rulers, while they could tolerate the same regime for over two decades, meanwhile Georgia overthrew its rulers and cleared up the system third time after its independence. For sure, the Azerbaijan is the the first in terms of patient for its rulers category in the region. PS. Armenias economic growth was certainly not impressive.
Eric Livny on Thursday, 21 June 2018 12:46

Ani, I am sure you are a better judge of the Armenian people. From what Ive read, however, there have been quite a number of recent attempts to overthrow the regime and/or cause it to change a course of action. For example, exactly 3 years ago, in June 2015, Electric Yerevan protests caused the government to cancel the plan to raise electricity prices. Exactly two years ago, Armenia lived through the 2016 Yerevan hostage crisis.

Quote from Wikipedia:

Daredevils of Sasun (Armenian: Սասնա Ծռեր Sasna Tsrrer; the name is taken from an epic poem) stormed a police station in Yerevan, Armenia, and took nine hostages. They demanded the release of opposition leader Jirair Sefilian, and the resignation of President Serzh Sargsyan. Two policemen were killed in the attack. The group began a standoff with government forces, with growing crowds of protesters joining the calls for the resignation of the president. In a 2017 survey the 38% of respondents supported Sasna Tsrers actions, while 16% condemned.

End of quote from Wikepedia.

BTW, Azerbaijani peoples patience is not endless either. Baku can quickly deteriorate into a bloodbath, as has already happened in the past.

Ani, I am sure you are a better judge of the Armenian people. From what Ive read, however, there have been quite a number of recent attempts to overthrow the regime and/or cause it to change a course of action. For example, exactly 3 years ago, in June 2015, Electric Yerevan protests caused the government to cancel the plan to raise electricity prices. Exactly two years ago, Armenia lived through the 2016 Yerevan hostage crisis. Quote from Wikipedia: Daredevils of Sasun (Armenian: Սասնա Ծռեր Sasna Tsrrer; the name is taken from an epic poem) stormed a police station in Yerevan, Armenia, and took nine hostages. They demanded the release of opposition leader Jirair Sefilian, and the resignation of President Serzh Sargsyan. Two policemen were killed in the attack. The group began a standoff with government forces, with growing crowds of protesters joining the calls for the resignation of the president. In a 2017 survey the 38% of respondents supported Sasna Tsrers actions, while 16% condemned. End of quote from Wikepedia. BTW, Azerbaijani peoples patience is not endless either. Baku can quickly deteriorate into a bloodbath, as has already happened in the past.
Simon Appleby on Thursday, 21 June 2018 08:12

When one looks at the sectors with the highest growth rate in Georgia (construction, banking and tourism), none of them has the capacity to absorb much unskilled labour. Most of the financial sectors activity is in consumer finance and mortgages, so there is some trickle-down to the commercial retail sector and construction market, but less so to the SME sector that is important in employing and training people.

When one talks to domestic investors in Georgia and Armenia, they often have capital and access to finance, a good concept for a new business and an understanding of the market, but no skilled workers to execute it. In-house training without outside support could take years and be hugely costly, likewise staffing the business with foreigners until local trainees are competent. In the face of this huge barrier to entry, they throw their hands in the air and build another block of flats or buy more cryptocurrency. Meanwhile 60% of the working age population are unemployed or underemployed. The capital is there to employ people but the skills are not in place for potential workers to be absorbed into a modern workforce.

The huge skills gap with the West at professional level/university graduate level has been quite well addressed over the past 20 years; many Georgian and Armenian universities turn out satisfactory accountants, doctors, engineers, economists etc. that with further training become very competent professionals. The same can not be said for the vocational education and training system, which is targeted at the mass of the working age population; it is still quite weak and participation rate is one-tenth what one would see in a modern European or East Asian economy.

The greatest welfare mechanism is solid, well-compensated employment, the funds from which then flow to the vulnerable within the family (elderly and disabled) in the Caucasian manner. Unless VET is targeted at industry needs for a modern economy and is affordable, the lack of skilled workers will see capital amassed at the top of societys pyramid remain tied up in assets that are not labour-intensive and the hoped-for trickle down wont occur, with negative implications for social stability.

When one looks at the sectors with the highest growth rate in Georgia (construction, banking and tourism), none of them has the capacity to absorb much unskilled labour. Most of the financial sectors activity is in consumer finance and mortgages, so there is some trickle-down to the commercial retail sector and construction market, but less so to the SME sector that is important in employing and training people. When one talks to domestic investors in Georgia and Armenia, they often have capital and access to finance, a good concept for a new business and an understanding of the market, but no skilled workers to execute it. In-house training without outside support could take years and be hugely costly, likewise staffing the business with foreigners until local trainees are competent. In the face of this huge barrier to entry, they throw their hands in the air and build another block of flats or buy more cryptocurrency. Meanwhile 60% of the working age population are unemployed or underemployed. The capital is there to employ people but the skills are not in place for potential workers to be absorbed into a modern workforce. The huge skills gap with the West at professional level/university graduate level has been quite well addressed over the past 20 years; many Georgian and Armenian universities turn out satisfactory accountants, doctors, engineers, economists etc. that with further training become very competent professionals. The same can not be said for the vocational education and training system, which is targeted at the mass of the working age population; it is still quite weak and participation rate is one-tenth what one would see in a modern European or East Asian economy. The greatest welfare mechanism is solid, well-compensated employment, the funds from which then flow to the vulnerable within the family (elderly and disabled) in the Caucasian manner. Unless VET is targeted at industry needs for a modern economy and is affordable, the lack of skilled workers will see capital amassed at the top of societys pyramid remain tied up in assets that are not labour-intensive and the hoped-for trickle down wont occur, with negative implications for social stability.
Eric Livny on Thursday, 21 June 2018 12:50

Could not agree more, Simon! I would only add that decent schooling and improved socialization starting from an early age, well before VET, could do wonders in terms of changing the motivations and behavior of Georgian males so many cannot be employed, period.

Could not agree more, Simon! I would only add that decent schooling and improved socialization starting from an early age, well before VET, could do wonders in terms of changing the motivations and behavior of Georgian males so many cannot be employed, period.
Simon Appleby on Thursday, 21 June 2018 17:00

Schools, agreed, but the teachers are all female. With many boys lacking a responsible male adult in their life to act as a role model (a common problem in the West too), we need a Scout Troop in every village.

Schools, agreed, but the teachers are all female. With many boys lacking a responsible male adult in their life to act as a role model (a common problem in the West too), we need a Scout Troop in every village.
Guest - DBlarcom on Wednesday, 08 August 2018 19:53

Perceptive analysis! Well done.

Perceptive analysis! Well done.
Already Registered? Login Here
Register
Guest
Tuesday, 25 September 2018

Captcha Image

Our Partners