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A blog about economics in the South Caucasus.

Regional Disparities in Georgia

Regional development policy, defined as aid and assistance given to economically less developed regions, is an issue for almost every country that seeks territorial unity. Putting the arguments of equity or efficiency aside, states with high regional disparities are potentially exposed to the political risk of disintegration. This threat can come from both developed and underdeveloped regions. While more advanced regions are capable of independence and might even decide to strive for secession, weaker ones, especially those bordering unpleasant neighbor-states or feeling oppressed, might be easily won over by other parties. That is why almost every country of the world has some type of regional development policy that seeks to eradicate spatial disparities.

The existence of a policy fostering spatial equalization has greater importance in ethnically or religiously diverse states and federations, where integrity is difficult to sustain. Additionally, socialist countries were found to favor regional development policies more than others. Egalitarianism and economic equality as a precondition for all sorts of equality, including political and social, were the explicit goals of the active regional policy conducted by the Soviet Union. However, here the latent goal of keeping all the regions on par in order not to encourage secessionist motives among the strongest regions, which were not willing to share their wealth with the regions lagging behind, was likely the most important reason for such a policy.


THE ECONOMICS OF REGIONAL DISPARITIES

Economically, regional development policy attempts to create conditions for sustainable growth in all regions. That, in turn, is expected to lead to a gradual equalization of living standards. The population-weighted coefficient of variation in regional gross value added (GVA) per capita, known as the Williamson index, is a widely accepted measure of regional inequality. Back in 1965, based on an empirical analysis the US economist Jeffrey G. Williamson concluded that the relationship between the economic development of a nation and regional disparities has an “inverted U-shape”. The empirical regularity works in the following way: at the early stages of development regional disparities tend to widen with the economic development of the state, while more mature growth also promotes a convergence in the living standards of territorial units. The pattern is largely similar to what was observed by the Ecoomics Nobel Prize winner Simon Kuznetz about income inequality and by Harvard economist Claudi Goldin about gender inequality.

Both Kuznetz and Williamson were particularly worried about the strain induced by widening inequality in the early stages of development and the ability of less developed countries to cope with that. However, this argument is less convincing in the light of a 2003 study by economists Raja Shankar and Anwar Shah. They found that a hands-off approach is a better way of eradicating regional disparities than an interventionist policy. Their cross-country analysis suggested that free factor mobility and minimum standards of basic services (that is how hands-off approach is defined) can serve the goals of regional development better than an interventionist policy. Two other findings of Shankar and Shah are that higher regional disparities are peculiar to developing rather than developed countries and to large unitary states rather than federations.


REGIONAL DISPARITIES IN GEORGIA

chart1

 

Even though Georgian regional inequality in economic activity is largely attributable to the urbanization levels of the regions, not the regions per se, and despite the fact that we now have less inequality than in 2007 or 2008, the dynamics of the Williamson index of regional inequality over the past years produces the impression that we are still on the left side of the “inverted U”. While regional disparities had been widening before the crisis in 2008, there has been a tendency for equalization in the two years following the crisis. After economic recovery in 2010, regional inequality, as measured by the Williamson index, has started to picked up again. What is more interesting is that the distribution of population between the Georgian regions exhibits a similar pattern as the Williamson index. Population distribution, as measured by the Gini Index, became more unequal (i.e. concentrated) in the “good times” of peace, stability and economic growth and tended to be more equal in the “bad times” of war, crises and social unrest (see the chart). Of course, the short time series and the marginal nature of the changes does not allow for decisive conclusions, but if this co-movement continues then that is good news, indicating that labor in Georgia is mobile and the concentration of economic activity coincides with the concentration of labor, potentially reaping the benefits of increasing returns to scale.

 

chart2

 

Taking a closer look at interregional mobility in Georgia today suggests that, in contrast to mobility in Soviet times – when qualified people were made to work in various, mostly rural, regions – nowadays internal migration is voluntary and is clearly centered in the capital. Tbilisi and nearby regions are the most attractive places for interregional migrants to stay. 52% of interregional migrants over last five years live in Tbilisi (27%) and Kvemo Kartli (25%), two regions with high GVA per capita (see the chart). This once again emphasizes that regional or urban-rural disparities are, to a large extent, self-curing.


DOES GEORGIA NEED AN INTERVENTIONIST REGIONAL POLICY?

Georgia is a developing country and high regional income disparities are more the norm than the exception for nations like ours. Additionally, we are neither an excessively diverse federation nor a socialist state. So, in terms of politics too, regional disparities do not threaten the territorial integrity of Georgia that much.

Considering the global experience, there is little the Georgian government can do to eliminate regional disparities at this stage of development. Whilst labor and capital mobility is unconstrained, all we need is for all regions to be provided with the minimum standard of basic services.

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Guest - Eric Livny on Friday, 21 June 2013 23:22

While Michael is not signed on this post, I recognize his handwriting.

Two points.

FIRST, I don't quite understand the rationale for "leaving the questions of equity or efficiency aside" when these are exactly the questions with which the Georgia is mostly concerned. Of course, territorial integrity is certainly a factor explaining Georgia's efforts to integrate and develop Kvemo Kartli and Samtskhe Javakheti. However, there is no danger that Kakheti or Imereti would decide to establish themselves as independent kingdoms, and yet these two regions are subjects of targeted regional development programs. There are all the reasons in the world to develop these regions rather than expect their populations to move to Tbilisi.

In particular, Imereti is sufficiently urbanized, has a sufficiently large "home market" and is sufficiently remote from Tbilisi to develop as an independent agglomeration, retaining and attracting skilled labor and capital. It now has its own airport and government institutions, and with further improvement of the rail and road infrastructure can develop strong industry, agribusiness, tourism, trade and logistics sectors.

Kakheti, which suffered the most from the Russian embargo, is also likely to be able to keep a large part of its population in place given its yet untapped agribusiness and wine tourism potential. According to reliable industry sources, the opening of the Russian market will triple the price of grapes received by the farmers in the coming year. As a result, additional land will be brought into circulation, while private investment in processing will allow redeploying labor from low productivity subsistence agriculture to higher productivity industrial jobs. In Kakheti, not in Tbilisi! A regional policy seeking to coordinate the actions of private investors, improve transport infrastructure, deliver higher quality education and training, etc., will simply speed up the process.

SECOND, your conclusion seems to be hanging in the air. There is certainly a lot the Georgian government CAN AND IS DOING to reduce regional disparities. One may ask whether:
1) the Georgian government SHOULD be trying to promote regional development at all (you seem to suggest that it shouldn't based on Raja Shankar and Anwar Shah);
2) the particular policies in place make sense from the efficiency or any other point of view (you ignore this question completely).

While Michael is not signed on this post, I recognize his handwriting. Two points. FIRST, I don't quite understand the rationale for "leaving the questions of equity or efficiency aside" when these are exactly the questions with which the Georgia is mostly concerned. Of course, territorial integrity is certainly a factor explaining Georgia's efforts to integrate and develop Kvemo Kartli and Samtskhe Javakheti. However, there is no danger that Kakheti or Imereti would decide to establish themselves as independent kingdoms, and yet these two regions are subjects of targeted regional development programs. There are all the reasons in the world to develop these regions rather than expect their populations to move to Tbilisi. In particular, Imereti is sufficiently urbanized, has a sufficiently large "home market" and is sufficiently remote from Tbilisi to develop as an independent agglomeration, retaining and attracting skilled labor and capital. It now has its own airport and government institutions, and with further improvement of the rail and road infrastructure can develop strong industry, agribusiness, tourism, trade and logistics sectors. Kakheti, which suffered the most from the Russian embargo, is also likely to be able to keep a large part of its population in place given its yet untapped agribusiness and wine tourism potential. According to reliable industry sources, the opening of the Russian market will triple the price of grapes received by the farmers in the coming year. As a result, additional land will be brought into circulation, while private investment in processing will allow redeploying labor from low productivity subsistence agriculture to higher productivity industrial jobs. In Kakheti, not in Tbilisi! A regional policy seeking to coordinate the actions of private investors, improve transport infrastructure, deliver higher quality education and training, etc., will simply speed up the process. SECOND, your conclusion seems to be hanging in the air. There is certainly a lot the Georgian government CAN AND IS DOING to reduce regional disparities. One may ask whether: 1) the Georgian government SHOULD be trying to promote regional development at all (you seem to suggest that it shouldn't based on Raja Shankar and Anwar Shah); 2) the particular policies in place make sense from the efficiency or any other point of view (you ignore this question completely).
Guest - RT on Saturday, 22 June 2013 00:34

Sorry, can you change a legend to the last chart? Not quite clear what KK, MM, etc are.

P.S. I can guess but not everybody will :-)

Sorry, can you change a legend to the last chart? Not quite clear what KK, MM, etc are. P.S. I can guess but not everybody will :-)
Guest - Nino on Saturday, 22 June 2013 01:21

RT, thanks for the suggestion. I will, if possible. However, I assume all those interested in the regional development of Georgia have already seen our report and if they have, then they will recognize our abbreviations :)

RT, thanks for the suggestion. I will, if possible. However, I assume all those interested in the regional development of Georgia have already seen our report and if they have, then they will recognize our abbreviations :)
Guest - RT on Saturday, 22 June 2013 01:52

Don't you want this post to _make_ people interested in regional development of Georgia? ;-)

Don't you want this post to _make_ people interested in regional development of Georgia? ;-)
Guest - Nino on Saturday, 22 June 2013 01:15

Thanks for your rather detailed comment, Eric!
I will try to address both of your points, clarifying all the possible related confusions.
First, what I would like to emphasize is that Michael has little to no fault in any of the mistakes or misjudgements, if any, of my post. Even though he gave me a couple of suggestions, I made the final decisions and therefore, I am the only person, responsible for the content.
Now, I will try to clarify the two points you raise.
1) I do not really find any major contradiction with the first point and issues raised in the blog. Even though it is highly unlikely now, there is always a hypothetical chance of secession of any of the regions. Moreover, not each, but most of the regions have been independent Kingdoms (like, Abkhazia, by the way) before the annexation by the Russian empire. Therefore, I do not really see the reasons why regions should be treated differently. As for the regional development tools you quote, not sure about the impact of the location of government institutions (I assume, you mean Parliament in Kutaisi) and governments effort to coordinate the businesses, all the others you mention, e.g. roads and education are nothing but hands-off policy approach that I consider to be a solution and that is defined as a "free factor mobility and minimum standards of basic services" in the literature. One additional point here about SJ and KK, the reason to treat these regions "differently", I would say, is the language barrier to mobility that distinguishes inhabitants of these regions from others and even addressing the language issues would fit in the definition of the hands-off approach.
2) As for my opinion about whether the government should try to reduce regional disparities or not, the answer depends on what you call regional disparities. For me it is all about people living better, not about regions having their own factories, parliaments or towers. As for particular policies, it needs more elaboration and what I answer more rests on only the logic above and commonsense and based on that I personally would support the policies, connecting people and giving them enough education to be mobile and not to be paternalistically directed by the government where and in which industry they should work in.
Hopefully, I managed to clarify my points.
P.S. As for Michael's handwriting, the fact that he has been my teacher of Economics might have played a role in this case :) However, I am sure that our opinions would differ even if his handwriting is suspected.

Thanks for your rather detailed comment, Eric! I will try to address both of your points, clarifying all the possible related confusions. First, what I would like to emphasize is that Michael has little to no fault in any of the mistakes or misjudgements, if any, of my post. Even though he gave me a couple of suggestions, I made the final decisions and therefore, I am the only person, responsible for the content. Now, I will try to clarify the two points you raise. 1) I do not really find any major contradiction with the first point and issues raised in the blog. Even though it is highly unlikely now, there is always a hypothetical chance of secession of any of the regions. Moreover, not each, but most of the regions have been independent Kingdoms (like, Abkhazia, by the way) before the annexation by the Russian empire. Therefore, I do not really see the reasons why regions should be treated differently. As for the regional development tools you quote, not sure about the impact of the location of government institutions (I assume, you mean Parliament in Kutaisi) and governments effort to coordinate the businesses, all the others you mention, e.g. roads and education are nothing but hands-off policy approach that I consider to be a solution and that is defined as a "free factor mobility and minimum standards of basic services" in the literature. One additional point here about SJ and KK, the reason to treat these regions "differently", I would say, is the language barrier to mobility that distinguishes inhabitants of these regions from others and even addressing the language issues would fit in the definition of the hands-off approach. 2) As for my opinion about whether the government should try to reduce regional disparities or not, the answer depends on what you call regional disparities. For me it is all about people living better, not about regions having their own factories, parliaments or towers. As for particular policies, it needs more elaboration and what I answer more rests on only the logic above and commonsense and based on that I personally would support the policies, connecting people and giving them enough education to be mobile and not to be paternalistically directed by the government where and in which industry they should work in. Hopefully, I managed to clarify my points. P.S. As for Michael's handwriting, the fact that he has been my teacher of Economics might have played a role in this case :) However, I am sure that our opinions would differ even if his handwriting is suspected.
Guest - Eric Livny on Saturday, 22 June 2013 02:52

Nino, what you are saying about education policy makes a lot of sense. Better education, starting with the preschool level, will enable people to move to more productive industrial occupations and service jobs, in and outside their region. Given limited resources, education-focused interventions should be targeted at regions that are lagging behind. If targeted, educational measures, such as those discussed in the report we produced for UNICEF, fall under my definition of regional policy. They address regional disparities, promote social justice, and increase productivity. And there is nothing particularly paternalistic about such a regional policy. It grants people many more occupational choices and enhances their spatial and, more importantly, social mobility.

All this, however, contradicts your conclusion that "there is little the Georgian government can do to eliminate regional disparities at this stage of development." Indeed, there is no reason for the government to build industrial plants. If viable, such plants could be built by the private sector. However, the government can and should address coordination failures in overcoming scale effects in regional development. Sometimes, all it takes is building one good road, a bridge, or a ski lift.

Nino, what you are saying about education policy makes a lot of sense. Better education, starting with the preschool level, will enable people to move to more productive industrial occupations and service jobs, in and outside their region. Given limited resources, education-focused interventions should be targeted at regions that are lagging behind. If targeted, educational measures, such as those discussed in the report we produced for UNICEF, fall under my definition of regional policy. They address regional disparities, promote social justice, and increase productivity. And there is nothing particularly paternalistic about such a regional policy. It grants people many more occupational choices and enhances their spatial and, more importantly, social mobility. All this, however, contradicts your conclusion that "there is little the Georgian government can do to eliminate regional disparities at this stage of development." Indeed, there is no reason for the government to build industrial plants. If viable, such plants could be built by the private sector. However, the government can and should address coordination failures in overcoming scale effects in regional development. Sometimes, all it takes is building one good road, a bridge, or a ski lift.
Guest - Conor Kearney on Thursday, 27 June 2013 19:40

I was pleased to see your work on the study (I presume) contributing to further commentary and discussion. However, you'll not be very surprised to hear that (although I am very critical of some aspects of EU regional policy) I'm not in agreement with simply dropping such intervention.

To take just one element in Shankar and Shah's approach, the definition of minimal standards of basic services would itself be a challenging political process. I also suggest that the very limited data on Georgia that you quote is not really sufficient to support your argument (even if you are careful in your claims here) and describing internal migration as voluntary does somewhat underplay the economic imperative.

Anyway, like I said it was good to see continued discussion ...

I was pleased to see your work on the study (I presume) contributing to further commentary and discussion. However, you'll not be very surprised to hear that (although I am very critical of some aspects of EU regional policy) I'm not in agreement with simply dropping such intervention. To take just one element in Shankar and Shah's approach, the definition of minimal standards of basic services would itself be a challenging political process. I also suggest that the very limited data on Georgia that you quote is not really sufficient to support your argument (even if you are careful in your claims here) and describing internal migration as voluntary does somewhat underplay the economic imperative. Anyway, like I said it was good to see continued discussion ...
Guest - Nino on Thursday, 27 June 2013 19:43

Thank you so much for your comment. Of course, the definition of "minimal standards of basic services" is somewhat arbitrary. And indeed, I agree that Georgian data series are too short to draw serious conclusions about the future of the regional policy. I respect your opinion, as you have got a huge experience of working in this field. Even so, almost by definition of my profession, I would still opt for as little government intervention, as possible. Following Milton Friedman, I am sure that people do learn and seek opportunities but I am not sure about the governments (especially about the governments of developing states and especially of those states with soviet experience and soviet-minded people still in the government) that they can arrange things better than the market does.

Thank you so much for your comment. Of course, the definition of "minimal standards of basic services" is somewhat arbitrary. And indeed, I agree that Georgian data series are too short to draw serious conclusions about the future of the regional policy. I respect your opinion, as you have got a huge experience of working in this field. Even so, almost by definition of my profession, I would still opt for as little government intervention, as possible. Following Milton Friedman, I am sure that people do learn and seek opportunities but I am not sure about the governments (especially about the governments of developing states and especially of those states with soviet experience and soviet-minded people still in the government) that they can arrange things better than the market does.
Guest - Conor Kearney on Thursday, 27 June 2013 19:46

I’m afraid that I can’t resist rising to the bait on this.

Lots of economists have a slightly more rounded view of the relationship between individuals, Government and the market than Uncle Milton does. For example, check out Book V of The Wealth of Nations (“On the Revenue of the Sovereign or Commonwealth”) by one A. Smith … although this closing Book is mysteriously absent from some recent editions. (This really annoyed me in the case of a nice hardback edition that I bought last year – reminded me of the photographs on the walls of Stalin’s Kremlin being altered to ensure that the past better reflected the present. )

And that’s without going near the hotbed of radicalism that is Keynesianism: one or two Keynesians have been identified as economists. I suspect that referring you to someone like Paul Krugman might be seen as merely provocative. (Although, to my mind, his writings are often both perceptive and responsible; and he's well aware of the limits of Keynesianism.)

However, for a justification of the European Union’s earlier increase of structural interventions – at a time when thinking on the subject was arguably somewhat clearer than it is at present – it is still difficult to beat the coherence and elegance of Tomasso Padoa-Schioppa (Efficiency, Stability and Equity: A Strategy for the Evolution of the Economic System of the European Community -1987.) The clue is in the title. Padoa-Schioppa was a banker, economist and later Italy’s Minister of Economy – and far from left wing.

For more recent arguments that are relevant you might refer to the IMF, an organisation that is not usually seen as being dangerously radical. See for example their February 2010 staff position note “Rethinking Macroeconomic Policy” by their economic counselor and head of research Olivier Blanchard and others. Frighteningly up to date for me and very interesting, but for some reason I doubt that it’s Angela Merkel’s favourite reading.

I’d be very happy to continue this discussion.
And ... thanks for your work on the report (and the translation)!

I’m afraid that I can’t resist rising to the bait on this. Lots of economists have a slightly more rounded view of the relationship between individuals, Government and the market than Uncle Milton does. For example, check out Book V of The Wealth of Nations (“On the Revenue of the Sovereign or Commonwealth”) by one A. Smith … although this closing Book is mysteriously absent from some recent editions. (This really annoyed me in the case of a nice hardback edition that I bought last year – reminded me of the photographs on the walls of Stalin’s Kremlin being altered to ensure that the past better reflected the present. ) And that’s without going near the hotbed of radicalism that is Keynesianism: one or two Keynesians have been identified as economists. I suspect that referring you to someone like Paul Krugman might be seen as merely provocative. (Although, to my mind, his writings are often both perceptive and responsible; and he's well aware of the limits of Keynesianism.) However, for a justification of the European Union’s earlier increase of structural interventions – at a time when thinking on the subject was arguably somewhat clearer than it is at present – it is still difficult to beat the coherence and elegance of Tomasso Padoa-Schioppa (Efficiency, Stability and Equity: A Strategy for the Evolution of the Economic System of the European Community -1987.) The clue is in the title. Padoa-Schioppa was a banker, economist and later Italy’s Minister of Economy – and far from left wing. For more recent arguments that are relevant you might refer to the IMF, an organisation that is not usually seen as being dangerously radical. See for example their February 2010 staff position note “Rethinking Macroeconomic Policy” by their economic counselor and head of research Olivier Blanchard and others. Frighteningly up to date for me and very interesting, but for some reason I doubt that it’s Angela Merkel’s favourite reading. I’d be very happy to continue this discussion. And ... thanks for your work on the report (and the translation)!
Guest - Peter McCavana on Tuesday, 03 September 2013 21:46

Whispered aside:
(Sorry for intruding, everybody)

Hello there, Conor!
Fancy meeting you here!...
I hope all is going well for you.
You're welcome to stop with us here on your travels (esp. as rooms are becoming vacant, as the two eldest have now left home...).
You can get in touch via [email protected]

Keep up the good work!
All zee best,

Peter
P.S.
Trivial frivolous aside within the aside:
As an economist, don't you find it a funny coincidence that the "new town" in England is called Milton Keynes?!

Whispered aside: (Sorry for intruding, everybody) Hello there, Conor! Fancy meeting you here!... I hope all is going well for you. You're welcome to stop with us here on your travels (esp. as rooms are becoming vacant, as the two eldest have now left home...). You can get in touch via [email protected] Keep up the good work! All zee best, Peter P.S. Trivial frivolous aside within the aside: As an economist, don't you find it a funny coincidence that the "new town" in England is called Milton Keynes?!
Guest - Nino on Thursday, 27 June 2013 19:47

It is very useful and interesting to have discussion with a person like you. Once I take closer look at some of these literature, I might even change my liberal opinion. Thank you so much!

It is very useful and interesting to have discussion with a person like you. Once I take closer look at some of these literature, I might even change my liberal opinion. Thank you so much!
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