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A blog about economics in the South Caucasus.

The Puzzle of Poverty and Wages in Georgia


POVERTY PERSISTING…

Any Georgian growing up in the “dark” 1990s (a literally dark, and rather gloomy period in the recent history of our country) would remember the canned milk powder distributed, together with some other goodies, to families with children aged below 5. These black and white cans were often used as flower pots in many of these families…

Being a kid from that dark age, one author of this blog was surprised to discover that, according to the World Bank’s poverty estimations, Georgia is doing worse today than it did then(!). . In particular, if in 1996 only 5% of the population were living on less than 1.25USD per day (i.e. in extreme poverty), in 2010, the share of extremely poor stood at 18%, whereas the share of people living on less than 2USD per day rose from 14% to 36%. Should we believe these figures or, rather, trust our senses?

At first sight, the national poverty statistics (see dark line on the chart) tell a very different story, with the poverty rate dropping by a whopping 40 percentage points from 2000 to 2012. Yet, this entire “improvement” is due to changes in the methodology for assessing national poverty, making it quite difficult to make sense of the long-term trends in poverty. The first revision, dating back to 2004, established a more modest subsistence minimum, reducing poverty estimates by some 10-15 percentage points. Since 2007, poverty rates are not calculated with respect to subsistence minimum, but rather as a share of targeted social assistance (TSA) recipients in the population, reducing the “poverty rate” by another 30 percentage points.

What these manipulations fail to disguise, however, is that there has been no significant improvement in the poverty situation. In all years, other than those in which there was a change in methodology, temporary poverty declines did not exceed a single percentage point. Thus, while the situation today is certainly not worse than in the dark 1990s of my childhood, poverty rates have not declined despite having much more light on the streets of Tbilisi.

 

Sept-19_2014_500_2


DESPITE A NINE-FOLD INCREASE IN REAL WAGES!

Despite stagnating poverty statistics, Georgia is definitely a “brighter” place today compared to 1996. In particular, real wages, i.e. wages adjusted for the level of prices, have grown almost 9 times (from 81 GEL in 1996 (in 2012 prices) to 713GEL in 2012. Let us illustrate the significance of this improvement by comparing the ratio of nominal wages to subsistence minimum (for working-age men) then and now: at the dawn of the 21st century, an average hired worker was unable to keep himself above water; in 2012 he was earning enough to support about four additional family members.

Such a spectacular growth in real wages was not something unique to Georgia – most transition economies have experienced a similar trend given the very low base from which they started evolving (see, for instance, ILO’s Global Wage Report 2012/2013). What is puzzling, however, is that Georgia did not ride the wave of real wage improvements to get many more people out of poverty. Why is Georgia’s poverty so stubbornly persistent?

One might think of several explanations, which individually or collectively could help reconcile the seemingly incompatible trends we observe: rising real average wages and persisting poverty.

FIRST, higher wages are naturally benefiting only those earning wages. Unfortunately, in parallel with a decline in employment (from 57.3% in 1998 to 56.6% in 2013), Georgia has seen an increase in the share of self-employed in total employment (from 57% to 61%). The vast majority of Georgian self-employed are de facto unemployed rural dwellers, who are not receiving wages and, consequently, do not benefit from wage increases. Salaried workers currently comprise only a bit more than a fifth of Georgia’s entire population (one of the lowest proportions in the world). Moreover, their share declined from 25% in 1998 to 21% in 2012.

SECOND, obviously, wage increases have not been uniform. Theoretically, if every fifth person earns five times more than what is needed for subsistence (see chart) and shares his/her income with four others, the entire population would be exactly at the subsistence level of income. Of course, this is not happening. There has been very little improvement in the wages of low skill workers, resulting in income inequality growing from 0.37 in 1996 to 0.4 in 2013. Today’s poor may, perhaps, find (very) partial consolation in the fact, that while more equal, the society of the 1990s was not a better society. Having a job did not necessarily help one escape poverty. The already low salaries were often paid late or never, commonly referred to as “frozen” wages (and pensions, too).

THIRD, the poverty phenomenon is very closely related to Georgia’s high urban-rural divide. As has been pointed out in many studies (for instance, see World Bank’s 2005 study), the increase in poverty was a result of growth being concentrated in a limited number of economic activities, without an effective mechanism to redistribute at least some of the gains to rural households at the bottom of the income distribution. Thus, real wage growth did make a difference where it could, i.e. in cities. But it failed to bring prosperity to the villages, where non-farm employment opportunities are almost inexistent. According to Liberal Academy Tbilisi report (2012), the urban-rural poverty gap is in the 20-25% range, having been increasing over time.

FOURTH, by introducing more effective redistribution mechanisms beginning in 2007, Georgia may have been able to lift some of the poor out of poverty, reducing the poverty rate by 2-4 percentage points. Yet, these very mechanisms discourage aid recipients from getting formal jobs and lifting themselves out of poverty in a more sustainable and self-reliant manner. The disincentives associated with TSA policies may have been further strengthened by the doubling of benefits in 2013 and the integration of Social Services Agency (SSA) and Revenue Service databases, which resulted in about 20,000 families losing their TSA (MoLHSA, 2013).


WHAT IS TO BE DONE?

Incidentally, the dilemmas associated with Georgia’s TSA policies feature in our interviews with some of the foreign-invested agribusinesses operating in Georgia. As reported by companies, since even a few days of seasonal work stand in the way of whole households receiving the SSA allowance, people are not willing to take formal seasonal jobs, wreaking havoc in labor-intensive rural industries. Paradoxically, rural districts with very high poverty and unemployment rates are now suffering acute labor shortages. Employers willing to pay cash-in-hand with no Revenue Service filing may be fined heavily; workers injured or killed on the job are not covered by insurance in this case.

The TSA system clearly has to be reevaluated taking into account seasonal employment patterns in rural areas. The current policy discourages otherwise employable citizens from seeking seasonal work to supplement family incomes for fear of the whole household losing welfare entitlements. Both the vulnerable families in question and the enterprises starved of labor are losing valuable opportunities as a result. While complete abolition of these payments would likely present too dramatic a disruption, the government should explore ways to reduce the disincentives to work. Options might include phased discounts to welfare payments for households whose members seek seasonal work or distinguishing between temporary labor – like seasonal farm work – and other forms of employment.

In the end, working with the private sector to create jobs is the only way to reduce rural poverty in a sustainable fashion. This, rather than tinkering with poverty measurement methodologies, should be the front and center of the Georgian government’s anti-poverty agenda.

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Guest - Florian Biermann on Friday, 19 September 2014 16:15

Interesting article. Rising poverty is not unusual when a country develops (Kuznets Curve). The problematic incentives set by social benefits seem to be something specific go Georgia, as many other developing countries do without social welfare altogether.

The only possibility we know so far to get rid of these incentives is the introduction of a negative income tax / basic income a la Friedman. But if only 25% of Georgians are in regular employment, their positive income tax payments may not be sufficient to pay for those who receive negative income tax.

Another possibility, which I think is not appreciated sufficiently in the general debate on social welfare systems, is the provision of subsistence level in kind. Instead of giving people money, give them a certain amount of bread, vegetables, energy etc. per month. In Georgia, this could boost demand for local agricultural products, if the government would buy that stuff and distribute it among the poor. The incentives to pick up regular work would arguably not be reduced that much if the only thing you get from the government are some tomatoes and cucumbers. Moreover, a basic income solution would arguably be cheaper if the basic income is paid in terms of vegetables.

Interesting article. Rising poverty is not unusual when a country develops (Kuznets Curve). The problematic incentives set by social benefits seem to be something specific go Georgia, as many other developing countries do without social welfare altogether. The only possibility we know so far to get rid of these incentives is the introduction of a negative income tax / basic income a la Friedman. But if only 25% of Georgians are in regular employment, their positive income tax payments may not be sufficient to pay for those who receive negative income tax. Another possibility, which I think is not appreciated sufficiently in the general debate on social welfare systems, is the provision of subsistence level in kind. Instead of giving people money, give them a certain amount of bread, vegetables, energy etc. per month. In Georgia, this could boost demand for local agricultural products, if the government would buy that stuff and distribute it among the poor. The incentives to pick up regular work would arguably not be reduced that much if the only thing you get from the government are some tomatoes and cucumbers. Moreover, a basic income solution would arguably be cheaper if the basic income is paid in terms of vegetables.
Guest - Eric Livny on Friday, 19 September 2014 18:20

Just to get people to work would be a major achievement. When I see my 30 y.o. neighbor (former rugby player) watching TV all day long, I know that something is broken in the system. When I see my other neighbors playing backgammon and washing own cars on a daily basis using free tap water (not metered in Georgia!) I know something is broken in the system. When I hear about (potential) workers refusing formal employment because they are afraid of losing their welfare, I know something is broken in the system.

Just to get people to work would be a major achievement. When I see my 30 y.o. neighbor (former rugby player) watching TV all day long, I know that something is broken in the system. When I see my other neighbors playing backgammon and washing own cars on a daily basis using free tap water (not metered in Georgia!) I know something is broken in the system. When I hear about (potential) workers refusing formal employment because they are afraid of losing their welfare, I know something is broken in the system.
Guest - Aaron Erlich (@aserlich) on Friday, 19 September 2014 18:42

I think what the studies of worker programs in Western context miss in a place like Georgia is that so many folks have been unemployed for so long, they have forgotten the discipline of work. There are many public works projects in Georgia that would benefit from largely unskilled labor (tree-planting, for example). The problem appears that these unemployed people somehow have enough money (remittances, social assistance) that their reservation price for working is fairly high. I wonder how much of that money unemployed are receiving is government social assistance and not remittances and goods in kind from subsistence agriculture producing relatives. However, I think the question is exactly right. It appears Georgia doesn't have good policy options to spur these people to work. Fun article!

I think what the studies of worker programs in Western context miss in a place like Georgia is that so many folks have been unemployed for so long, they have forgotten the discipline of work. There are many public works projects in Georgia that would benefit from largely unskilled labor (tree-planting, for example). The problem appears that these unemployed people somehow have enough money (remittances, social assistance) that their reservation price for working is fairly high. I wonder how much of that money unemployed are receiving is government social assistance and not remittances and goods in kind from subsistence agriculture producing relatives. However, I think the question is exactly right. It appears Georgia doesn't have good policy options to spur these people to work. Fun article!
Guest - Elene on Friday, 19 September 2014 19:04

Paradoxical and yet - true! Great article!

Paradoxical and yet - true! Great article!
Guest - RT on Friday, 19 September 2014 19:34

Some disagree :)
Премьер Грузии утверждает, что количество граждан, проживающих за чертой бедности, сократилось значительно
http://www.apsny.ge/2014/pol/1411168381.php

Some disagree :) Премьер Грузии утверждает, что количество граждан, проживающих за чертой бедности, сократилось значительно http://www.apsny.ge/2014/pol/1411168381.php
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